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Working Capital Management

INDEX
Chapter I WORKING CAPITAL MANAGEMENT Introduction Objective of the study Need of the study Scope of the study Limitations of the study

Chapter II

INDUSTRY PROFILE COMPANY PROFILE

Chapter III

DATA ANALYSIS & INTERPRETATION

Chapter IV

FINDINGS SUGGESTIONS CONCLUSION

Annexures

BIBLIOGRAPHY

INTRODUCTION
ST. MARYS P.G. COLLEGE,

Working Capital Management Working capital management involves the relationship between a firm's short-term assets and its short-term liabilities. The goal of working capital management is to ensure that a firm is able to continue its operations and that it has sufficient ability to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash. Capital required for a business can be classified as following Fixed capital Working capital

Long term funds are required to create production facilities through purchase of fixed assets such as plants and machinery, land, building, furniture etc. investing in these assets represent that part of firm's capital, which is blocked on a permanent or fixed basis and is called fixed capital. Fund needed for short-term purpose for the purchase of raw material, payment of wages and other day-to-day expenses etc. these funds are known as working capital, in simple words working capital refers to that part of the firm's capital which is required for financing short-term or current asset such as cash, marketable securities, debtors and inventories. Working capital is also known as 'revaluing or circulating capital or short-term capital'. According to Shubin, "working capital is the amount of fund's necessary to cover the cost of operating the enterprise". One of the important aspects of company's financial management is the management of working capital. Working capital management refers to the management of ST. MARYS P.G. COLLEGE,

Working Capital Management current assets, namely cash, marketable securities, stock, i.e., inventories and debtors and current liabilities like bills payable, sundry creditors, bank overdraft, outstanding expenses, etc. THEORETICAL PERSPECTIVE A significant portion of financial research is concerned with the management of working capital. This issue has been extensively investigated at both conceptual and empirical levels. Prasad (2001) conducted a research study on the working capital management in paper industry. His sample consisted of 21 paper mills from large, medium and small scale for a period of 10 years. He reported that the chief executives properly recognised the role of efficient use of working capital in liquidity and profitability, but in practice they could not achieve it. The study also revealed that fifty percent of the executives followed budgetary method in planning working capital and working capital management was inefficient due to sub-optimum utilisation of working capital. Sarvanan (2001) made a study on working capital management in ten selected nonbanking financial companies. For this he employed several statistical tools on different ratios to examine the effective management of working capital. He concluded that the sample firms had placed more importance upon the liquidity aspect compared to that of the profitability. Dulta (2001) observed that the various components of working capital of HPMC had not been used efficiently and net working capital position had worsened continuously during the period of study (1991 to 1998).

ST. MARYS P.G. COLLEGE,

Working Capital Management Chundawat & Bhanawat (2000) analysed the working capital management practices in IDBI assisted tube and tyre companies for the period 1994- 1998 by using some relevant ratios and concluded that the working capital management of IDBI assisted companies was more effective than the industry as a whole. Srivastav & Yadav (1986) developed a multiple discriminant model in determining the effectiveness of working capital management using four ratios and a sample test of 40 textile companies, of which 20 'not effective' (sick) and 20 'effective' (healthy), they empirically found that their model correctly classified 95 percent of the companies in the sample. Though accounting ratios played a very important role in most of the above studies, but a choice of ratios or group of ratios is often a difficult task due to the absence of a proper theory of ratio analysis (Bhattacharya, 1997). To overcome this problem Bhattacharya (1997) developed an alternative ratio model for the measurement and monitoring the efficiency of working Capital Management. Dr. Santanu Kr. Ghosh & Santi Gopal Maji: This makes an attempt to examine the efficiency of working capital management of the Indian cement companies during 1992-93 to 2001 -2002. For measuring the efficiency of working capital management three index values -performance index, utilisation index and overall efficiency index are calculated, instead of using some common working capital management ratios. Using industry norm as target -efficiency level of the individual firms, this paper also tests the speed of achieving that target level of efficiency by an individual firm during the period of study. Finding of the study indicates that the Indian Cement Industry as a whole did not perform remarkably well during this period.

ST. MARYS P.G. COLLEGE,

Working Capital Management Working capital management involves the relationship between a firm's short-term assets and its short-term liabilities. The goal of working capital management is to ensure that a firm is able to continue its operations and that it has sufficient ability to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash. Capital required for a business can be classified as following Fixed capital Working capital

Long term funds are required to create production facilities through purchase of fixed assets such as plants and machinery, land, building, furniture etc. investing in these assets represent that part of firm's capital, which is blocked on a permanent or fixed basis and is called fixed capital. Fund needed for short-term purpose for the purchase of raw material, payment of wages and other day-to-day expenses etc. these funds are known as working capital, in simple words working capital refers to that part of the firm's capital which is required for financing short-term or current asset such as cash, marketable securities, debtors and inventories. Working capital is also known as 'revaluing or circulating capital or short-term capital'. According to Shubin, "working capital is the amount of fund's necessary to cover the cost of operating the enterprise". One of the important aspects of company's financial management is the management of working capital. Working capital management refers to the management of ST. MARYS P.G. COLLEGE,

Working Capital Management current assets, Namely cash, marketable securities, stock, i.e., inventories and debtors and current liabilities like bills payable, sundry creditors, bank overdraft, outstanding expenses, etc., Although the management of current assets is similar to that of fixed assets. Yet it differs to some extent from the management of fixed assets in three important ways. First, in managing fixed assets, time is very important, consequently, discounting and compounding aspects of time element play a significant role in capital budgeting and a minor one in the management of current assets. The level of fixed assets can not be adjusted in the shorter run although the level of both current and fixed assets depending upon the production and sale and it is possible to adjust the level of current assets depending upon the current level of activity of the firm. Second, larger holding of current assets especially cash, strengthen firm's liquidity position and reduces briskness, but it also reduces the overall profitability in the form of idle investment in current assets no doubt increase the profitability but at the same time reduces the liquidity which may results in financial embarrassment. Stock out cost and out of pocket expenses defending the suit. Third, the level of fixed as well as current assets depends upon expected sales, but it is only current assets, which can be adjusted with sales fluctuation in the short run. There is an unavoidable need to manage working capital efficiently. Hence it forms an impotent function of finance manager, working capital management. Requirements much of the finance manager's time. Represents a sizable proportion of company's, total investment in assets. Determine at a glance, the liquidity and solvency position of the company to outsides creditors. CLASSIFICATION OR KINDS OF WORKING CAPITAL ST. MARYS P.G. COLLEGE,

Working Capital Management Working capital may be classified in two ways. On the basis of concept On the basis of time

On the basis of concept working capital may be classified as permanent or fixed working capital and temporary or variable working capital.

KINDS OF WORKING CAPITAL

On the basis of concept

On the basis' of time

Gross Net Temporary or Variable Working Capital Working Capital Working Capital

Permanent or Fixed Working Capital

CAPITAL 1) On the basis of concept a) Gross working capital In broader sense the term working capital refers to t the gross working capital and represents the amount of funds invested in current assets. Thus 'gross working capital is the capital invested in total current assets of the enterprise. Thus GWC = Total of Current assets b) Net working capital

ST. MARYS P.G. COLLEGE,

Working Capital Management In narrow sense, the term working capital refers to the net working capital. Net working capital is the excess of current assets over current liabilities. Thus NWC = Current assets- Current liabilities To conclude it may be said that both gross and net concepts of working capital may be suitable only for proprietary from of organizations such as sole-trader or partnership firms. But gross concept is suitable to the company form of organization where there is a divorce between ownership, management and control. 2) On the basis of time a) Permanent or fixed working capital Permanent or fixed working capital is the minimum amount which is required to ensure effective utilization of fixed facilities and for maintaining the circulation of current assets for example a firm has to maintain a minimum level of raw materials, work-inprocess, finished goods and cash balances. This can further classified into Regular working capital Reserve working capital

Regular fixed working capital required to ensure circulation of current assets from cash to inventories to receivables and from receivables to cash and so on. Reserve fixed working capital is the excess amount over the requirement for regular working capital, which may be provided for contingencies that may arise at unstated periods such as strikes, rise in prices, depression etc.

ST. MARYS P.G. COLLEGE,

Working Capital Management b) Temporary or variable working capital Temporary or variable working capital is the amount of working capital, which is required to meet the seasonal demand and some special exigencies, this can be classified as Seasonal working capital Special working capital

The capital required to meet the seasonal needs of the enterprise is called seasonal working capital. Seasonal working capital is that part of working capital which is required to meet special exigencies such as launching of extensive marketing campaigns for conducting research etc.

Fig 1. Permanent / Fixed Working capital Temporary / Variable Working capital

Fig.2

Fig 1. Permanent working capital is stable or fixed over time. While temporary or variable working capital fluctuates. Fig 2. Permanent working capital is also increasing with passage of time due to expansion of business but even then it does not fluctuate as variable working capital with sometime increases and sometimes increases and decreases.

ST. MARYS P.G. COLLEGE,

Working Capital Management Objectives of working capital The need of working capital cannot be over emphasized. Every business needs some amount of working capital. The need for working capital arises due to the time gap between production and realization of cash from sales. Following are some of the objects. For the purpose of raw materials, components, spares, etc. 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 maintain the inventories of raw materials, work-in-progress, store and spares and finished stocks. The amount needed as we in a new concern depends primarily upon its size and the ambitions of its promoters, greater the size of the business unit, generally, larger will be the requirements of working capital. The amount of working capital goes on increasing with the growth and expansion of business till it attains maturity. Issues in working capital management Working capital management refers to the administration of all aspects of current assets, namely cash, marketable securities, debtors and stock (inventories) and current liabilities. The financial manager must determine levels and composition of Current assets. He must see the right sources aspects of working capital are Time working capital management requires much of the financial manager's time. Investment working capital represents a large portion of the total investment in assets.

ST. MARYS P.G. COLLEGE,

Working Capital Management Criticality working capital management has great significance for all firms. but it is very critical for small firms. Growth the need for working capital is directly related to the firm's growth. Financial managers have to spend much of their time to the daily internal operations, relating to current assets and current liabilities of the firm. As the larger portion of the financial manager's time is devoted to working capital problems, it is necessary to manage working capital in the best possible way to get the maximum benefit. Investment in current assets represents a very significant portion of the total investment in assets. So financial manager should pay special attention to the management of current assets on a continuing basis. Actions should be taken to curtail unnecessary investment in current assets. Working capital management is critical for all firms, but particularity for small firms. Further, the role of current liabilities in financing current assets is far more

significant in case of small firms, as unlike large firms, they face difficulties in rising longterm finances. There is direct relationship between a firm's growth and its working capital needs. The financial manager should be aware of such needs and finance them quickly. Continuous growth in sales may require additional investment in fixed assets. It may, thus be concluded that all precautions should be taken for effective and efficient management of working capital.

ST. MARYS P.G. COLLEGE,

Working Capital Management OBJECTIVES OF THE STUDY 1. To study the various changes in working capital of Sujala Pipes Private Limited. 2. To study the working capital management with regards to cash, Receivables and inventory of Sujala Pipes Private Limited. 3. To study the liquidity position of Sujala Pipes Private Limited. SCOPE OF THE STUDY Financial management is that the managerial activity which is concerned with the planning and controlling of the firm's financial resources. Though it was a branch of economics till 1890 as a separate activity or discipline, it is of recent origin. Still it has no unique body of knowledge of its own and heavily on economics for its theoretical concepts even today. The subject of finance is of immense interest to both academician and practicing managers. It is of great interest of academicians because the subject is still developing and there are still certain areas where controlling exists for which no unanimous solutions have been reaches as yet. The present study aims at the following: Highlighting the necessity of current and current liabilities. Explain the principles of current asset, investment and financing. Focus on the proper mix of short term and long term financing for current assets. Emphasis the need and goal of establishing a sound credit policy. ST. MARYS P.G. COLLEGE,

Working Capital Management Suggest the need of monitoring the receivables. Highlight the need for and a nature of inventory. Explain the needs for holding cash. Focus on the management of cash collection and disbursement.

LIMITATIONS OF THE STUDY The major problem in completing the project is having not sufficient in order to know about the overall objectives of the study.

Study has been restricted only to working capital analysis.


The study is confined to the figures available on the paper and files only. Suggestions made are only on personal opinions.

DESIGN OF THE STUDY Working capital management is very significant aspect in the management of finance of any organization. By checking the level of working capital one can easily identify the liquidity and profitability position of the firm and the decisions regarding. 1. The level of working, which can be determined, by the level of current assets and current liabilities. 2. The composition of current assets and current liabilities

ST. MARYS P.G. COLLEGE,

Working Capital Management 3. Financing of current assets and current liabilities are of utmost importance and significant in the financial management of the business because it not only shows the financial efficiency of business but also its credit worthiness which has gained importance in these days of credit squeeze. This fact has been justified by many industries which have failed frequently due to faulty management of working capital, especially with regard to effect of various suggestions and regulations laid by tendon, core committee is very necessary. It is this view that a case study has been made on working capital management in Sujala Pipes Private Limited.

ST. MARYS P.G. COLLEGE,

Working Capital Management

ST. MARYS P.G. COLLEGE,

Working Capital Management

INDUSTRY PROFILE
PVC pipes poly vinyl chloride pipes have become synonymous, with modern living it is undoubtedly a product which has deeply penetrated in to common mans life. No wonder the industry has achieved remarkable progress in the terms of supply of raw materials, and diversification of processing capabilities and manufacturing of machinery and ancillary equipment sophistication. This versatile material with superior qualities such as light weight, easy processing corrosion resistance, energy conservative, non taxis etc. may substitute to a large estimate of many conventional and costly industrial materials like wood, glass, metal and leather etc. in the future the manifold applications of plastics in the field of automobiles, electronics, electrical, packaging and agriculture give its immense utility in PVC plastics. At present as percent of total requirement of raw material and almost all type of plastic machines required for the industry are not adequate available. The present investment in all the three segments of industry namely production of raw materials, expansion and diversification of raw materials. Expansion and diversification of processing capacities, manufacturing of processing machinery. Equipment is 1250 crores and it provided employment at more than 8 lakh people. Plastics have been subjected to leaves not only at the central level but also the state and local government. These levels have effected the price of the plastic products adversely. The per-capita consumption of plastics is very low at 0.5kg as against the world average of 11kgs. The per-capita consumption is 68kgs in FRANCE, 33kgs in UK. And even in Asian countries like SOUTH KOREA it is 8.5kgs.

ST. MARYS P.G. COLLEGE,

Working Capital Management On account of their inherent advantage in properties and versatile in adoption and use, plastics have come to play a vital role in a variety of applications the world over. In our country plastics are used in making essential consumer goods which are of daily use for common man. Such as baskets, carry bags, bottles, pipes, pens, etc. they also have applications in agriculture, building constructions. Water management resources, engineering and electronics. The government of India recognized the importance of plastics in agriculture appointed on march 7, 1981 a national committee on the use of plastics in agriculture under chairmanship of Dr G.V.K. Rao. The committee has forecast a treatment as fright of drop irrigation through a network of plastics tubes and pipes. In its origin large scale adoption of irrigation would lead to support in demand for PVC pipes. LDAP tubes and play proper by lane emitters. The committee made a number of recommendations would so a long way is increase the consumption of plastics, which at present is very low. The committee has highlighted the importance of use of PVC resin is the manufacture of rigid pipes, flexible pipes and sheets are being used for agriculture operations to carry water from place and living of panels and reservoirs to reduce sweepers and most important in drop irrigation sequence A break through had already taken place in the field of channel lining with poly urethane in the state of Gujarat. Madhya Pradesh, Punjab and Haryana. The irrigation departments in these states have taken concrete steps to incorporate canal living with LDPE (Low density) pipes on priority basis. Another variety of plastics that requires artificial manufacturing relates to true engineering plastics which is used as an alternative to (or) replacement of metals in load needing applications. ST. MARYS P.G. COLLEGE,

Working Capital Management Modified P.P.O. Nylon, polycetal, poly carbonates. Polyster (PBT/PET) phendic are same of the plastic materials following under the category of en engineering plastics. Engineering plastics are being increasingly used for various applications in automatic, electronic, telecommunications and other industries. The plastics are classified into two major classes. 1. Thermo Plastics 2. Thermostats The thermo plastics become sufficiently soft as the applications of heart. The thermostats are the initial application of heat and pressure of heat and pressure subjected to fire, but up on further application of heat pressure they are cured to heat and pressure. They are cured to hard moulded price which cannot be resofted by reheating. LDPE: low density poly ethylene: Production of LDPE was stated in the year in 1955. at present there are 3units manufacturing LDPE with a total capacity of 1.15 lakh tonnes. Products targeted for LDPE by the end of 1999 is placed at 1.86 lakh tones. HDPE: High density poly ethylene: Production of HDPE in India commenced in 1968, at present there is a unit (play defines industries Ltd.) in India producing HDPE by the end of 1989-1990 was producing 1.25 lakhs tones.. PVC (Poly Vinyl Chloride): Production of PVC started in 1961, against first production of PVC in the world, 1927. At present there are 6 units manufacture of PVC resins. The total installed capacity ST. MARYS P.G. COLLEGE,

Working Capital Management comes to 1.7 lakhs tones. The production target of PVC by the end of 1989-90 is placed of 2.33 lakhs tones. Polystyrene: Polystyrene was first manufactured in India in may 1987. The production target of polystyrene by the end of 1989-90 is set out to 29000 tones. Poly propylene The first production of poly propylene in India commenced in 1978. A production target of 36000 tonnes is achieved by the end of 1993-94. ABS (Acrylonitril Butadiene Styrene) The production of ABS in India started in 1978. The present total installed capacity is 5000 tonnes. Problems : Raw material is always been a problem to be recorded with the plastic industry. The situation was slightly improved recently and is expected to charge considerably by commissioning the major petrol chemical project in the pipe line by the year 1990. The Maharastra Gas cracker complex. Haldia petrol chemical and reliance

petrochemicals together with the expansion of existing giants will go a long way to mitigate this long, study problems. By the terminal year the plan the installed capacity targeted is almost 8 lakh tones.

ST. MARYS P.G. COLLEGE,

Working Capital Management The steep rise in the raw material as a result of imposition of duties and taxed poses another problem to the plastic industry. On account of this domestic price of finished goods are higher than the rest of world. Apart from this the administrated pieces for basic raw materials have not been implemented with a balanced view to accommodating the interest of both consumers and manufacturers. And chloride 85% of the polymers are made form naptha feedstock. Hence the pricing naptha by the government has a cascading effects. Export of the plastic goods: Plastic have been excellent potentialities. Our country equipped with all kinds of processing machines and skilled labour and undoubtedly. An extra effort to boost export finished plastics goods will yield rich dividend. Today, India exports plastic product to as many as 80 countries all over the world. The exports which were stagnant at around Rs 60-70 crores per annum doubled to 129 crores in early 1990 in 1991-92 plastic industry has taken up a challenge of achieves export target of 250 crores. Major export markets for plastic products and usage are Australia,

Bangladesh, Canada, Egypt, France, Holland, Italy, Hong Kong, Srilanka, Sweden, Taiwan, UK, USA and Russia. With a view to boosting the experts, the plastics and linoleums, export promotion council has requested the government to reduce import duty on plastic raw materials supply of raw materials at international prices, fix duty free backs on weighted average basis and charge freight rate on plastic products on weight has interested of volume basis.

ST. MARYS P.G. COLLEGE,

Working Capital Management Prospects: The production of various plastics raw materials the country is expected to double by the end of the seventh five-year plan. When the PCS capacity expansion programs is completed as well the new plants by other manufacturers like PIL, century Enka, reliance are set up during the period the consumption of touch the one million tones mark by 198990. There is immense scope for the use of plastics in agriculture an irrigation and thus the plastic industry is on the threshold of an explosive growth. ROLE OF PLASTICS IN THE NATIONAL ECONOMY Plastic are get perceived as just simple colorful house hold products in the minds of common man. A dominant part of plastics of present and future improved their utilization in the following areas. Agriculture, forestry and water management. Automobiles and transportation. Electronics and telecommunications and buildings. Constructions and furniture especially wood substitutes. Food processing and packaging. Power and gas distribution.

COMPANY PROFILE
ST. MARYS P.G. COLLEGE,

Working Capital Management Sujala Pipes Pvt Ltd. Nandyal was incorporated in the year 1988 it is located in the industrial estate, Nandyal. The company has Rani Plastic Pipes Industry as its sister concern in the manufacture of PVC pipes. This company is promoted by the Managing Director Sri S.P.Y.Reddy, B.E(Mech) who has decades of experience in the manufacturing industry. The company has three main PVC pipes brands. They are Nandi, SUJALA, and Rani. But the flagship brand is NANDI PIPES. The name NANDI derives form the historical aspects of this town, Nandyal. The brand name NANDI PIPES as taken from the pilgrimage place called MAHANANDI which is 15 km from Nandyal. The company has diversified in to various fields in the recent past. Apart from manufacture of mineral water under the brand name Name mineral water dairy products Nandi dairy which supplies regular milk to the people of Nandyal and villages in and around Nandyal. The company rightly thinks there is an inseparable relation between education and business. The Chairman, Mr. S.P.Y. Reddy encouraging women to educate by establishing women colleges in Nandyal. Sujala pipes also gone for expansion program. They have taken over monarch pipes Anantapur which was a main competitor. The company is providing good source of employment to the people who are at both workmen level as well as administrative level. Sujala Pipes which was once upon a time a sole manufacturer of plastic goods in to many companies. Their turnover touched a remarkable figure nearly Rs. 30 crores in the year 1999-2000. The main objective in starting this industry was to cater to the needs of farmers to facilitate water flow in this area which lakhs rainfall and to use the water resources productively. This helps the farmers in lifting the ground water to the surface as well as free flow of the water as an and when necessary. ST. MARYS P.G. COLLEGE,

Working Capital Management Initially the industry was producing polythene pipes and PVC(poly vinyl chloride) pipes were introduced under the same brand name later in 1984-85 the growth of PVC industry in Rayalaseema area of A.P. has seen rapid growth in the early 90s. The

company also produce PVC fittings. In short it can be concluded that the company enjoys 95% of south Indian company does is free offer of transportation to the door steps of the customers when he purchases 100 or more pipes. The company also provides free medical facilities to the employees. Sujala pipes also involved in social activities by providing free water supply to the needy people. Company organize free medical camps to the poor people. unemployed youth in fulfilling their career objective. As the company caters to the needs of farmer and its main products is agricultural related product they enjoy maximum benefits given by the government. They are no unions in the organization as there an there is good relation and working climate exists in the organization between management and employees. It basically work on 2 shifts. Residences are also provided by the company to its workforce and employees at concessional rent. Very recently the company had approached the Karur Vysya bank, Nandyal for working capital loan 150 lakhs in order to meet the changing requirements of industrial scenario. Financially the company markets sounds very good. It gives a credit of 21 days to its customers. It has a wide distribution network both in A.P. as well as neighbour states in the south India. Industrial accidents are also nil in the company. The company markets products through telephone orders. It has a wide network of distributors all over south India. As and when the order is received, it immediately sent to the production department It also gives loans to

ST. MARYS P.G. COLLEGE,

Working Capital Management as well as stores. Basing on orders requirements and availability at the stores the products are manufactured and sent. Production process of PVC pipes: The material used in PVC pipes manufacture are: PVC (poly vinyl chloride) Tri basic lead sulphate(TBCS) Die basic lead sulphate (DBLS) Calcium steric Lead steric Calcium carbonate(Ca Ca3) Titanic dioxide Steric acid Wax

The above material are mixed in fixed proportion in a big container and they get processed in to a solidified product. Immediately pipes of various diameters are

manufactured by using various moulds. Once the pipes are manufactured they will be shifted to warehouse. As and when the requirement comes, they will be dispatched to the designated place.

RESEARCH METHODOLOGY
The data were collected from primary and secondary sources.

ST. MARYS P.G. COLLEGE,

Working Capital Management The secondary data were obtained from the published annual reports of Sujala Pipes Private Limited, from 2003-2004 to 2007-2008. The collecting the data were analyzed by

Changes in working capital, Cash, Receivables, Inventory, Liquidity ratio, Cost of goods sold statement and Creditors conversion period.

The cash analysis is done by cash to Net working capital ratio. The receivable analysis is done by debtors turnover ratio, average collection period and incremental investment in receivables. The inventory analysis is done by percentage of inventory to total current assets, inventory turnover ratio, holding period of inventory and changes in sales and inventory. The liquidity analysis is done by current ratio, quick ratio and absolute liquid ratio.

Data collection

ST. MARYS P.G. COLLEGE,

Working Capital Management The data required for the project work is collected from the the period between 2003-2008. Primary data The primary data for this collected from personal interviews and discussions with executives and the officials of the company. Secondary data The secondary data is collected from the following sources. Annual financial reports of the company following sources for

Limitations The major problem in completing the project is the time of 8 weeks which ever less in order to know about the overall objectives of the study. Study has been restricted only to working capital analysis

ANALYSIS OF DATA Overall review The goal of working capital management is to manage the firm's current assets and current 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 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 current assets must be managed efficiently in order to maintain the liquidity of the firm, while not keeping too high level of anyone of them. The ST. MARYS P.G. COLLEGE,

Working Capital Management interaction between assets and current liabilities is, therefore the main them of working management. Accessing working capital requirement "Working capital management is the life blood and controlling never center of a business". No business can successfully run without an adequate amount of working capital. To avoid the shortage of working capital at once, an estimate of working capital requirements should be made in advance so that arrangements can be made to procure adequate working capital. But estimation of working capital requirements is not an easy task and large number factors have to be taken into consideration while an estimate of working capital requirements: Total cost incurred on material, wage and overheads. The length of time for which raw material are to remain in stores before they are issued for production The length of production cycle or work-in-progress is, the time taken for conversion of raw material into finished goods. The length of sale cycle during which finished goods are to be kept waiting for sale. The average period of credit allowed to customers. The amount of cash required to pay day-to-day expense of the business. The average amount of each cash required making advance payment, if any The average credit period expected to be allowed by suppliers. Time lag in the payment of wages and other expenses.

ST. MARYS P.G. COLLEGE,

Working Capital Management From the total amount blocked in current assets estimated on the basis of the first even items given above, the total of current liabilities that is the last two items is deducted to find out the requirement of working capital. In order to provide for contingencies, some extra amount generally calculated as a fixed percentage of working capital can be aided as a margin of study.

ST. MARYS P.G. COLLEGE,

Working Capital Management WORKING CAPITAL MANAGEMENT IN SUJALA PIPES PVT., LTD The working capital in Sujala Pipes comprises nearly 60% of total capital employed. Hence working capital becomes an importance portion in the Sujala Pipes. Factors influencing working capital requirements in Sujala Pipes Private Limited. 1. Production program Its production programmer and those of suppliers, and customer affect the working capital requirement of Sujala Pipes. Thus the size of the working capital requirement is determined on the basis of the production programmed and size of the order by the customer in a year. 2. Sales budget As Sujala Pipes manufactures against customer order and most of the working capital requirements are met out of the realization of sales, the estimated sales have considerable influence on the working requirement of Sujala Pipes. 3. Finance Availability of finance that is, the cash and bank credit affects the working capital requirements of Sujala Pipes to considerable extent. 4. Manufacturing process In Sujala Pipes the length of manufacturing process varies from one production division to another, depending in the products springs and capacitors and the technological know how used. As the manufacturing process it has its influence on Sujala Pipe's working capital requirements.

ST. MARYS P.G. COLLEGE,

Working Capital Management 5. Period of Credit The period of credit allowed by the suppliers on purchases and the period of credit allowed to customers on sale also have their own influence on working capital requirement of Sujala Pipes. Sources of finance for working capital The working capital requirement is estimated through the preparation of capital and revenue budgets. The main source from which Sujala Pipes finances is working capital needs are Realization cash Cash credit from banks Cash credit from financial institutions and Trade credit

Objectives of working capital in Sujala Pipes Private Limited. The objectives of working capital in Sujala Pipes are mentioned below: To see that the level of inventory, loans and advances are satisfactory To see the debtors are within the norms To have least possible working capital so that the borrowings are reduced and not high interest cost is incurred To meet contingencies that is unexpected expenses To meet daily operating expenses

Analysis of Changes in working capital of Sujala Pipes Private Limited. Components of Working Capital in Sujala Pipes Private Limited. The working capital in Sujala Pipes consists of different components like inventory, sundry debtors, cash and bank balance, current liabilities etc., which are shown in the ST. MARYS P.G. COLLEGE,

Working Capital Management following table along with amount invested in each for the period of 5 years. The structure of working capitals is presented in the table for the purpose of effective analysis of current assets; current liabilities and net working capital have been calculated. Each component of current assets and current liabilities and expressed as a proposition to total assets total liabilities. Showing the components of working capital and % for 5 years of Sujala Pipes Private Limited. (Amount in Rs.)
Particular %1 2004- %1 %1 2003-04 2005-06 s 00 05 00 00 2006-07 %1 %10 2007-08 00 0

TOTAL CURRENT ASSETS


Inventori 3123285 es 8 Sunday 3099899 Debtors 1 Cash and 455855 Bank Loans and 3616532 Advances 1 Total 9885302 Current 5 Assets

102827 3114129 13 34 87 2 311374 1554396 31 37 17 05 7 4801962 0.5 670771 8 0.5 3 36. 415687 49. 4406878 48 5 83 2 3 32 836599 47 9123423 82

11337421 17 1274835 11 46298.356 0.0 44874.7 0.04 4 68 0.9 313100. 638870.3 0.29 8 8 80. 5798569 54.0 51545318 5 8 5 10981996 5.62 1072663 07

TOTAL CURRENT LIABILITIES


Sunday Creditors Secured deposits Provision for tax Total current Liabilities Net working Capital Trend of Net work capital

8912232 721335 5212963 64385729. 95. 5998956 95 97 96 94.2 2 09 9.38 94 8 6 445000 0.6 445000 0.6 4022674 4.3 9358999 6 5263029 100% 152962 2.4 2256726 1 741081 30 955181 7 181.48 % 5438636 5.38 3687873 700.12% 4 2503600 4.2 3674600 5.78 66889329. 94 42930636 815.7% 6366416 6 4360214 1 828.5%

Source : Published Annual reports of Sujala Pipes Private Limited from 2004-2008 Note: The trend of networking capital are calculated by taking the year 2004 as abase as 100 Analysis

ST. MARYS P.G. COLLEGE,

Working Capital Management The inventories are 32% of total current assets during 2003-2004 and 13% in 20042005 and 34% in 2005-2006 and 17% in 2006-2007. It shows the levels of inventory gradually increased in 2005-2006 and decreased from 2006 to 2007 and 11 % in 2007-2008 The sundry debtors are 31% of total current assets during 2003-2004, 37% in 20042005 and 17% in 2005-2006 and 0.04% in 2006-2007 and 0.04% in 2007 - 2008 . It shows that the amount of sundry debtors has been decreased during the period 2005-2008. The cash and bank balances are 0.5% of total current assets in 2003-2004 and 8% in 2004-2005 and 0.5% in 2005-2006 and 0.98% in 2006-2007 and 0.29% in 2007 - 2008. It shows increase from 2004-2005 and it was decreased in 2006 and it increased in 2007 but decreased in 2008. In loans and advances there is 36.5% of total current assets in 2003-2004 and 49.2% in 2004-2005 and 48% in 2005-2006, 80.5% in 2006-2007 and 54.05% in 20072008. Here we can say that company was taking more loans and advances in the year 20062007 but less in 2007-2008. The sundry creditors are 95% of the total liabilities in 2003-2004 and 97% in 20042005 and 96% in 2005-2006, 95.8% in 20062007 and 94.2% in 2007-2008. It shows a gradual decrease in creditors up to 2006-2008 except in 2004-2005. annual reports] Graph Showing the components of working capital of Sujala Pipes Private Limited. [Ref: 6.8 company

Graph Showing the Components of Working Capital

100 828.5

181.48 700.12

2003-04 2004-05 2005-06 2006-07 2007-08

815.7

ST. MARYS P.G. COLLEGE,

Working Capital Management

Graph Showing the components of working capital of Sujala Pipes Private Limited. The above graph showing changes Trend % of working capital of Sujala Pipes Private Limited.

Showing Statement of change in working capital 2003-04

Working Capital

2003 Amount in Rs.

2004 Amount in Rs.

Increase

Decrease

Current Assets Inventories Sundry Debtors Cash and Bank Loans and Advances Total Current Liabilities Total Net decrease in Working capital Total 61935962 43477991 827769 9524520 115766245 102396700 102396700 13369545 13369545 31232858 30998991 455855 36165321 98853028 93589996 93589996 5263032 8106513 13369545 43554018 43554018 26640801 16913217 30703104 12479000 371914

Source :

Published Annual reports of Sujala Pipes Private Limited from 2004 to 2008.

Analysis : Above table show statement of changing working capital during 2003-04 which has a net decrease in working capital Rs. 8106513.

ST. MARYS P.G. COLLEGE,

Working Capital Management

Showing Statement of change in working capital 2004-05


Working Capital 2004 Amount in Rs. 2005 Amount in Rs. Increase Decrease

Current Assets Inventories Sundry Debtors Cash and Bank Loans and Advances Total Current Liabilities Total Net decrease in Working capital Total 31232858 30998991 455855 36165321 98853028 93589996 93589996 5263029 4288788 9551817 10282787 31137406 670971 41568783 83659947 74108130 74108130 9551817 9551817 20950071 20950071 15193078 20950071 138415 215116 5403462

Source :

Published Annual reports of Sujala Pipes Private Limited from 2004 to 2008. table show statement of changing working capital during

Analysis : Above

2004-05 which has a net increase in working capital Rs 4288788

ST. MARYS P.G. COLLEGE,

Working Capital Management

Showing Statement of change in working capital 2005-06


Working Capital 2005 Amount in Rs. 2006 Amount in Rs. Increase Decrease

Current Assets Inventories Sundry Debtors Cash and Bank Loans and Advances Total Current Liabilities Total Net decrease in Working capital Total 10282787 311337406 670791 41568783 83659947 74108130 74108130 9551817 27296057 36847874 31141292 15543967 480196 44068783 91234239 5438365 5486365 36847874 36847874 35505799 35505799 19721765 20858505 15593439 190595 2500000

Source :

Published Annual reports of Sujala Pipes Private Limited from 2004 to 2008.

Analysis :

Above table show statement of changing working capital during 2005-06 which has a net increase in working capital Rs27296057

ST. MARYS P.G. COLLEGE,

Working Capital Management

Showing Statement of change in working capital 2006-07


Working Capital 2006 Amount in Rs. 2007 Amount in Rs. Increase Decrease

Current Assets Inventories Sundry Debtors Cash and Bank Loans and Advances Total Current Liabilities Total Net decrease in Working capital Total Source : 311141292 15543967 480196 44068783 51545318 91234239 54386365 54386365 36847874 6082762 42930636 109819965 66889329 66889329 42930636 42930636 19803871 19803871 12502965 11337421 46298356 3754389 158673 19803871

Published Annual reports of Sujala Pipes Private Limited from 2004 to 2008.

Analysis :

Above table show statement of changing working capital during 2006-07 which has a net increase in working capital Rs. 6082762.

ST. MARYS P.G. COLLEGE,

Working Capital Management

Showing Statement of change in working capital 2007-08


Working Capital 2007 Amount in Rs. 2008 Amount in Rs. Increase Decrease

Current Assets Inventories Sundry Debtors Cash and Bank Loans and Advances Total Current Liabilities Total Net decrease in Working capital Total 11337421 46298356 480196 44068783 109819965 66889329 66889329 42930636 43602141 Source : Analysis : 1274835 44874766 3131008 57985698 107266307 63664166 63664166 43602141 43602141 671505 17936502 17936502 2650812 13916871 16567683 11486176 3225163 10062586 1423590

3225163

Published Annual reports of Sujala Pipes Private Limited from 2004 to 2008 Above table show statement of changing working capital during 2007-08 which has a increase in working capital Rs.671505.

ST. MARYS P.G. COLLEGE,

Working Capital Management

CASH MANAGEMENT Introduction Cash is the important current asset for the operations of the Business. Cash is the basic input needed to keep the business running on a continuous basis; it is also the ultimate output expected to be realized by selling the service of product manufactures by the Firm. The firm should keep sufficient cash, neither more nor less. Cash shortage will disrupt the firm's manufacturing operations while excessive cash will simply remain idle, with out contributing anything towards the firm's profitability. Thus, major functions of the financial manager to maintain a sound cash position. Cash is the money, which a firm can disburse immediately with out any restriction. The term cash includes coins, currency and cheques held by the firm, and balances in its bank accounts. Some times near cash items, such as marketable securities or bank times deposits, are also includes in cash. The basic characteristic of near cash assets is that they can readily be converted to cash. Generally when a firm has excess of near cash, it invests it in marketable securities. This kind of investment contributes some profit to the firm. Facets of Cash Management : Cash management is concerned with the managing of 1. Cash flows into and out of the firm. 2. Cash flows with in the firm and 3. Cash balances held by the firm a points of time by financing deficit or investing surplus cash. It can be represented by a cash management cycle as shown in fig1. Sales generate cash, which has to be disbursed out. The surplus cash has to be invested while deficit has to be borrowed. Cash management seeks to accomplish this cycle at a minimum cost. At the same time, it also seeks to achieve liquidity and control.

ST. MARYS P.G. COLLEGE,

Working Capital Management

Cash management assumes more importance than other current assets because is the most significant and the least productive asset that a firm holds. It is significant because it is used to pay the firm's obligations. However, cash is unproductive. Unlike fixed assets or inventories, it does not produce goods for sale. Therefore, the aim of cash management is to maintain adequate control over cash position to keep the firm sufficiently liquid and to use excess cash in some profitable way.

Business Operation

Cash Collection Bonus Interest

Deficit Surplus

Cash Collection

Cash Collection

CASH MANAGEMENT IN SUJALA PIPES PVT LTD Sources of Cash : The main sources through which Sujala pipes gets cash are the collection from debtors, advances on sales and other sources. Payment of cash. The company's main item of expenditure is wages, salaries, bonus, expenditure salaries, bonus, and expenditure on development, sales tax, income tax, excise duty, payment to creditors, interest on borrowings. All the payment to creditors is made through cheque and cash even expenses are paid. Wages, salaries excise duty is paid monthly.

ST. MARYS P.G. COLLEGE,

Working Capital Management

CASH TO NET WORKING CAPITAL RATIO Table 1.1 : Showing Cash to Net Working Capital of Sujala Pipes Private Limited
(Amount in Rs.)

Particulars Cash and Bank Balances Net working Capital Cash to NWC Ratio

2000304 455855 5263029 8.7 (times)

2004-05 671031 9551817 7.02 (times)

2005-06 480193 36847873 1.3 (times)

2006-07 638870 42930636 1.4 (times)

2007-08 3131008 43602141 7.2 (times)

Source : Published annual reports of Sujala Pipes Private Limited from 2001 to 2005. Analysis : Table 2.1 portrays the size of cash and bank balances in Sujala pipes from 20032004 to 2004-2005 as a percentage of networking capital. The cash and bank balances were 8.7% of net working Capital during 2003-2004,7.02% during 2004-2005, 1.3% during 2005-2006, 1.4% during 2006-2007 and 7.2% during the year 2007-2008. Interpretation : This ratio indicates the proportion of cash and bank balances maintained by Sujala pipes. It is assumes per amount importance as the level of cash balances decides the liquidity profitability aspects of the company. The lower the cash to net working capital the greater may be the profitability of the concern and vice-versa. It any company holds too low cash and bank balances in relation to net working capital, it implies in ability of firm to meet day-to-day requirements of cash. In the present study cash to current ratio of Sujala pipes reveals it was 8.7% in 2003-2004, and it was decreased to 7.2% in 2004-2005, and decreased to 1.3% in 2005-2006 and increased to 1.4% in 2006-2007 and 7.2% in 2007-2008. This shows the organization cash and bank ST. MARYS P.G. COLLEGE,

Working Capital Management balances vary between 8.7% to 1.4%. However practice of holding cash balance in relation to networking capital indicates poor cash management in sales.

Graph Showing Cash to Net Working Capital Ratio Graph showing Cash to NWC

Cash to NWC

7.2

8.7

2003-04 2004-05 2005-06 2006-07

1.4

1.3 7.02

2007-08

Figure 1.1 : Graph Showing Cash to Net Working Capital Ratio The above graph showing changes cash to networking capital ratio of Sujala pipes Private Limited.

ST. MARYS P.G. COLLEGE,

Working Capital Management

RECEIVABLES MANAGEMENT
Introduction Account receivable or trade credit is the most prominent force of the modern business. It is considered as an essential marketable tool, acting as a bridge for the movement of goods through production and distribution stages to customers finally. A firm grants credit to production and distribution stages to customers finally .A firm grants credit to protect its sales from the competitor and to attract potential customers. Trade credit, thus credit receivable or book debts, which the firm is expected to collect in future. It also involves an element of risk as the cash payment has get to be received, hence they has to be carefully analyzed. Receivables constitute a substantial portion of current assets of several firms. They form about 1/3 part of current assets in India. As substantial amounts are tied up in trade debtors, it needs careful analysis and proper management, for proper management of receivable a concern must adopt an optimum credit policy. Optimum Policy The optimum investment in receivable will be at a level is a trade-off between cost and profitability. When the firm resorts to liberal credit policy the profitability of the firm increases on account of higher sales. However such a policy results in increased investment in receivables, increased changes of bad debts and more collection costs. The total investment in receivables increases and thus the problem of liquidity is credited. On the other hand a stringent credit policy reduces profitability but increases the liquidity of firm. Optimum credit policy therefore involves a trade off between the profit or sales that bring in receivable. On the one hand the cost of carrying bills receivables plus bad debts losses on the other. The optimum credit policy occurs at a point where there is " Trade-off between liquidity and profitability as shown in the chart below:

ST. MARYS P.G. COLLEGE,

Working Capital Management

Profitability Costs and benefits Liquidity Tight Credit Policy Loose

Optimum Credit Policy Variables of Credit Policy A firm should establish receivables policies after carefully considering both benefit and cost different policies. These policies relate to: Credit standard Credit term Collection procedures Credit Standard The term credit standards represent the basic criteria for extension of credit to customers. The level of sales and receivables are likely to be high. If the credit standard is relatively loose, as compared to a situation when there are relatively tight. The firm's credit standards are generally determined by the five "C"s, character, capacity, capital, collateral and condition. Character denotes his ability to manage the business Capital denotes his financial soundness ST. MARYS P.G. COLLEGE,

Working Capital Management Collateral refers to assets which the customer can offer by way of security Condition refers to the impact of general economic trends on the firm, or to special development in certain areas of economy that may affect in customer's ability to meet his obligations. Credit Terms It refers to the terms under which a firm sells goods on credit to its customers. The two components of credit terms are a) Credit period b) Cash Discount a) Credit Period Extending the credit period stimulates sales but increases the cost on account of more typing up of funds in receivable. Similarly, shortening the credit period reduces the profit on account of reduced sales, but also reduces the cost of tying up of funds in receivable. Determining the optimum credit period therefore involves locating the period where the marginal profits on increased sales are exactly offset by the cost of carrying the higher amount of account receivable. b) Cash Discount The effect of allowing cash discount can also be analyzed in the same pattern as that of the credit period. Attractive cash discount terms reduce the average collection period resulting in reduced investment in account receivable. Thus there is a saving in capital cost. On the other hand cash discount itself is a loss to the firm optimum cash discount is allowed at the point where the cost and benefit are exactly offsetting. Collection Procedure A stringent collection procedure is expansive for the firm because of high out of pocket costs and loss of goodwill of the firm among its customers. However it minimizes the loss on account of bad debts as well as increase saving in terms of lower capital costs on account of reduction in the size of different collection procedures or policies. ST. MARYS P.G. COLLEGE,

Working Capital Management

Cost of Maintaining Receivables The costs in respect to maintenance of receivables can be identified as followed: Capital Cost Maintenance of accounts receivable results in blocking of the firm's financial resources in them. This is because there is a time lag between the sale of goods to customers and the payment by them. The firm has therefore to arrange for additional funds to meet its obligations, such as payments from its customers. Additional funds may either be raised from outside or out of profit retained in the business. In both the cases, the firm incurs a cost. In the former cases, the firm has to pay interest to the outsider while in the latter case, there is opportunity cast to the firm that is the money which the firm could have earned otherwise by investing the funds elsewhere. Administrative costs The firm has to incur additional administrative cost for maintaining account receivable in the form of salaries to the staff kept for maintaining accounting records relating to Customers to determine their credit worthiness etc. Collection costs The firm has to incur costs for collecting the payments from its credit customers. Sometimes additional step may have to be taken to recover money from defaulting customers. Defaulting costs Sometimes after making all serious efforts to collect money from defaulting customer, the firm may not be able to recover the over dues because of the inability of the customers. Such debts are treated as bad debts and have to be written off since they cannot be realized.

ST. MARYS P.G. COLLEGE,

Working Capital Management

Study of the credit policy Credit policy adopted by a firm should be optimum neither too liberal nor too stringent. In order to determine the nature of credit policy followed by a firm the following techniques may be adopted. Computation of average age of receivable Computation of average age of receivables involves the computation of average collection period. The period so computed with the period fir the industry as a whole or with that of prevailing in the similar firms. Some of the methods for calculation of average age of receivable are as under. A) Months or days in the period -------------------------------------Accounts receivables turnover Where accounts receivables turnover is A) Credit sales in the period -------------------------------Avg account receivable B) Avg account receivable -----------------------------------Average monthly credit sales C) Average accounts receivables * months in a year ----------------------------------------------------------Credit sales for the year An increase in the average age of receivables or debt collection period is an index of a lenient credit policy or inefficiency in collection and vice versa. Accounts receivable management in Sujala Pipes Various reports, which serve as a control device for accounts receivable are prepared by all the units Sujala Pipes of and are submitted to central office they include Monthly sundry debtors report ST. MARYS P.G. COLLEGE,

Working Capital Management Report on age of account and Weekly debtors report Different units in Sujala Pipes Private Limited prepares monthly reports indicating the credit sales to customers and provides the opening balance at the beginning of the year, total dispatches done during the month, realization figures and balances of bills not submitted and out standing. Following up steps like finding reasons for not submitting the bills and there reasons are analyzed I. One more report is also prepared to analyze the age of each account receivable. The accounts due for more than one year and less than one year are analyzed, customer wise, to know why the amounts are outstanding. II. There is one more weekly debtors report, which is prepared by finance department of each unit for the purpose of internal control. III. The Sujala Pipes also makes provision for bad and doubtful debts on the basis of the period for which debts have been outstanding. The receivables of Sujala Pipes Private Limited, is analyzed by calculating debtor turnover ratio, average collection period, incremental investment in sales. I. Debtors turnover ratio : It indicates the number of times debtors turnover each year. It indicates the efficiency of staff entrusted with collection of debts. The higher the ratio it is better since it would indicates the debtors are being collected more promptly. Debtors should be always being taken at gross value. No provision for bad and doubtful debts should be deducted from them. Sales Debtors Turnover Ratio = ----------------------Debtors

ST. MARYS P.G. COLLEGE,

Working Capital Management

Table 1.2: Showing Debtors turnover ratio of Sujala pipes Private Limited. (Amount in Rs.) Particulars 2003-04 Sales Sunday Debtors Debtor Turnover Ratio Source : Analysis : 635788959 30998991 20.5 2004-05 551477486 31137406 17.7 2005-06 369891220 15543967 23.79 2006-07 722171487 46298356 15.59 2007-08 452109721 44874766 10.07

Published annual reports of Sujala Pipes Private Limited from 2004 to 2008. The calculated Debtors Turnover Ratio has 20.5 in 20003-2004 decreased to 17.7 in 2004-2005 and increased to 23.79 in 2005-2006 and decreased by 15.59 in 2006-2007 and decreased to 10.07 during the year 2007-2008.

Interpretation : There is no rule of thumb, which may be used, as a norm to interpret the ratio as it may be different from firm to firm. Depending upon the nature of the business. This ratio should be compared with the ratio of other firms doing similar business and a trend may also be found to make better interpretation of the ratio. Graph Showing Debtors Turnover Ratio :

Debtors Turnover Ratio

10.07 15.59

20.5

23.79

17.7

2003-04 2004-05 2005-06 2006-07 2007-08

Figure 1.2:Graph Showing Debtors Turnover Ratio ST. MARYS P.G. COLLEGE,

Working Capital Management The above graph showing changes Debtor Turnover ratio of Sujala pipes Private Limited. II. Average collection Period : Average collection period represents the average number of days for which a firm has to wait before it receivables are converted into cash. The ratio can be calculated as follows. Number of Working Days Average Collection Period = --------------------------------------------Debtors Turnover Ratio Table 1.3:Showing Average Collection Period of Sujala pipes Private Limited., (Amount in Rs.) Particulars Debtor Turnover Ratio Number of Working Days Average Collection Period Source : 2003-04 20.5 360 18 2004-05 17.7 360 21 2005-06 23.79 360 15 2006-07 15.59 360 24 2007-08 10.07 360 36

Published annual reports of Sujala Pipes Private Limited from 2004 to 2008.

Analysis : In the above table 2005-2006 to 2006-2008, we can see increase in the number of average of collection period. Generally the shorter Average collection period is better the quality of debtor turnover ratio shorter collection period implies quick payments by debtors . Interpretation : The Average collection period represent the average number of days for a which firm to wait before it receivables are converted into cash. We can the increase in the number of days from 2004-2005 to 2007-2008. It is satisfactory, moreover longer average collection period, larger are the chances of bad debts, shorter the average collection period the better is the quality of debtors as a collection period implies quick payment by debtors. As ratio may be different from firm to firm. Depending upon its credit policy nature of business and business conditions. ST. MARYS P.G. COLLEGE,

Working Capital Management Graph Showing Average collection Period : Average Collection Period

36

18

21 24 15

2003-04 2004-05 2005-06 2006-07 2007-08

Figure 1.3: Graph Showing Average collection Period The above graph showing changes in average collection period of Sujala pipes Private Limited.

ST. MARYS P.G. COLLEGE,

Working Capital Management Incremental investment in receivables: Table 1.4: Showing Incremental Investments in Receivables of Sujala Pipes Private Limited. SALES New Old 325662111 635788959 551477486 369891220 722171487 18 21 15 24 10.07 Average collection period New 49 18 21 15 24 Old

Year

2003-04 (Amount in Rs.) 635788959 2004-05 (Amount in Rs.) 551477486 2005-06 (Amount in Rs.) 395212606 2006-07 (Amount in Rs.) 722171487 2007-08 (Amount in Rs.) 455109721

Source: Published annual reports of Sujala Pipes Private Limited from 2004 to 2008. Incremental Investment Receivables

Change in investment = (SALESn/360)* ACP (SALESo/360)* ACPo Where n=new o=old 2004 = 635788959/360*18 325662111/360*49 = 44326231 31789448 = 12536783 2005 = 551477486/360*21 635788956/360*18 = 32169520 31789448 = 380072 2006 = 369891220/360*15 551477486/360*21 = 15412134 32169520 = -1675738 ST. MARYS P.G. COLLEGE,

Working Capital Management

2007

= 722171487/360*23 369891220/360*15 = 46138733 15412134 = 30726599

2008

= 452109721/360*10.07 7221171487/360*24 = 126451 481411432 = -48814678

Analysis The average collection period is a significant measure of collection activity and the quality of accounts receivables. The average collection period indicates the time lag between the date of sales and date of receipt of payment. The shorter the average collection period the better would be the quality of debtors as the time lag involves in converting sums will be less and prompt payments is made by debtors. The incremental investment in receivables is prepared in table 3.3 was in 2003-2004 Rs 12536783/-, in 2004-2005 380072/-, in 2005-2006 -16757385, in 2006-2007-30726599/-, in 2005-2006 - 48814678/-, 2006-2007 average collection period was noticed and it was varied 15 days to 23 days during the period study. Interpretation : If can be observed from the table considerable sums are invested in debtors in Sujala Pipes, at the same time a low turnover ratio and higher collection period implies inefficiency in management during 2003-2004. The management struggled in controlling inventory in receivables and by decreasing the incremental investment in 2005-2006 and 2007-2008. Investment in receivable has been considerable increased from 2003-2004 to 20042005 and declined in 2005-2006 and 2007-2008. The low investment in receivables in the year 2006 is due low sales in that period high average collection period occurred in 2004-

ST. MARYS P.G. COLLEGE,

Working Capital Management 2005. It shows the management efficiency in controlling the investment in receivables in the year 2006-2007.

INVENTORY MANAGEMENT
Introduction : The preceding two chapters basic strategies and consideration in managing current assets namely, cash and receivables are stocks of product a company is manufacturing for sale and components that make up a product. Inventories like receivables are also a significant portion of most firm's assets and accordingly require substantial investment. To keep these investments from becoming unnecessarily large, inventories must be managed efficiently. The various forms in which inventories exist in a manufacturing company are a) Raw Materials : Raw materials are those basic inputs that are converted into finished products through the manufacturing process. Raw material inventories are those units, which have been purchased and stored for future productions. b) Work-in-progress: The work-in-progress is that stage of stock, which is in between raw materials and finished goods. They are semi-finished products that need more work before they become finished products for sale. The quantum of WIP depends on the time taken in the manufacturing process. The greater the time taken in manufacturing, the more will be the amount of work-in-progress. c) Finished goods : Finished goods inventories are those completely manufactured products, which are ready for sale. Stocks of raw material and work-in-process facilitate production while stock of finished goods is required for smooth marketing operations.

ST. MARYS P.G. COLLEGE,

Working Capital Management The level of three kinds of inventories for a firm depends on the nature of its business. A manufacturing firm will have substantially high level of all three kinds of inventories.

A fourth kind of inventory: Firm also maintain suppliers. Suppliers include office and plant cleaning material oil, fuel, light bulbs etc. these materials do not directly enter into production, but are necessary for production process, usually these supplies are small part of inventory and do not involve significant investment. Therefore a sophisticated system of inventory control may not be maintained for them. [Ref : Financial management 9th edition IM pandey] Need for holding inventory : There are generally three major motives for holding inventories The transactions motive which emphasis the need to maintain inventories to facilitate smooth production and sale operations. The precautionary motive, which necessitates holding of inventories to guard against the risk of unpredictable changes in demand and supply forces and other factors. The speculative motive which includes the decision to increase or reduce inventory levels to take advantage of price fluctuations. A company should maintain adequate stock of material, as it is not possible for a company to procure raw material whenever it is needed and also for a continuous and smooth and uninterrupted production process. Objectives of Inventory Management : The main objectives of inventory management are operational and financial

1. Operate objectives mean that the material and spares should be available in
sufficient quantity to achieve interrupted production and said operation. ST. MARYS P.G. COLLEGE,

Working Capital Management 2. Financial objectives means that investment in inventories should not remain idle and minimum working capital should be locked in it. Both inadequate and excessive inventories are not desirable. They are two danger points within which the firm should operate. The objective of inventory management should be to determine and maintain the optimum level of inventory management. The optimum level will lie between two danger points of excessive and inadequate inventories. The firm should not over invest in inventories as excess a level of inventories consumes funds of a firm which cannot be used for any other purpose, and there it involves an opportunity cost, carrying costs such as costs of storage, handling, insurance and inspection. These costs will impair the firm's profitability further maintaining inadequate inventory are Production holds-up Failure to meet delivery commitments. Inadequate raw materials and work-in-progress inventories will result infrequent production interruptions. Thus the efficient inventory management should ensure a continuous supply of materials to facilitate uninterrupted production. Maintain sufficient stock of raw materials in periods of short supply and anticipate price changes. Maintain sufficient finished goods inventory for smooth sales operations and efficient customer services. Minimize the carrying cost and time. Control investment in inventories and keep it at an optimum level. Costs associated with inventory. The costs associated with managing inventory are:

ST. MARYS P.G. COLLEGE,

Working Capital Management To analyses inventory management by calculating inventories to total current assets, inventory turnover ratio, Holding period of the inventory and change in sale and inventory.

Inventories to Total Current Assets Table 1.5: Showing percentage of Inventories to Total Current Assets of Sujala pipes Private Limited., (Amount in Rs.) Particulars Inventories Total Current Assets % of inventory to total current assets Source : 2003-04 31232858 98853025 31.6 2004-05 10282787 83659947 12.3 2005-06 31141292 91234239 34 2006-07 11337421 109819965 10.3 2007-08 1274855 107266308 1.2

Published annual reports of Sujala Pipes Private Limited from 2004 to 2008.

Analysis : The table 4.1 shows inventory to total current assets as a percentage of the total current assets in the year 2003-2004 is 31.6%, in the year 2004-2005 is 12.3%, in the year 2005-2006 is 34%, in the year 2006-2007 is 10.3% and in the year 2007 - 2008 is 1.2%. Interpretation : The total inventory as a percentage of the total current assets has 31.6% in the year 2003-2004 it has gone down to 12.3% in the year 2004-2005 and again increase to 34% in the year 2006 and decreased to respectively 10.3%, 1.2% in the years of 2007 and 2008. This percentage of inventories to current assets indicates that the inefficiency of inventory management in Sujala Pipes has gone down from 2003-2006. Since there is ST. MARYS P.G. COLLEGE,

Working Capital Management decrease in the percentage indicates the inefficiency of inventory management has decreased.

Graph Showing percentages of Inventories to Total Current Assets

Percentages of Inventories to Total current Assets

10.3

1.2 31.6
2003-04 2004-05 2005-06 2006-07

34 12.3

2007-08

Figure 1.5:Graph Showing percentages of Inventories to Total Current Assets The above graph showing changes percentage of inventories to total current assets of Sujala pipes Private Limited.

ST. MARYS P.G. COLLEGE,

Working Capital Management

Inventory Turnover Ratio : Inventory turn over ratio indicates the efficiency of the firm in producing and selling its products. Sales -------------------------Average Inventory

Inventory turnover ratio =

Table1.6: Showing Inventory Turnover Ratio of Sujala pipes Private Limited., (Amount in Rs.) Particulars Sales Average Inventory Inventory Turnover ratio Source : 2003-04 635788959 46584410 13.6 2004-05 551477486 20757822 26.5 2005-06 369891220 207120395 17.8 2006-07 722171487 212393565 34 2007-08 452109721 1274835 35.46

Published annual reports of Sujala Pipes Private Limited from 2004 to 2008.

Analysis : The table 4.2 shows calculated Inventory Turnover Ratio, it has 13.6% in the year 2003-2004, in the year 2004-2005 26.5%, in the year 2005-2006 17.8%, in the year 2006-2007 34. % and 2007-2008 is 35.46%. Interpretation : Inventory turnover ratio measures the velocity and to measure the efficiency of the company selling its products. In the year 2003-2004 it was 13.6, and 26.5 in the year 20042005, and 17.8 decreased it in the year 2005-2006 and it was increased to 34 in the year 2006-2007 and it was increased to 35.46 in 2007-2008. The firm has to maintain efficient management of inventory. ST. MARYS P.G. COLLEGE,

Working Capital Management

Graph Showing Inventory Turnover Ratio Inventory Turnover Ratio

35.46

13.6 26.5 2003-04 2004-05 2005-06 2006-07 34 17.8 2007-08

Figure 1.6 : Graph Showing Inventory Turnover Ratio The above graph showing changes in inventory turnover ratio of Sujala Pipes Private Limited.

ST. MARYS P.G. COLLEGE,

Working Capital Management

Holding Period of Inventory : Table1.7:Showing Holding Period of Inventory : Year 2003-04 2004-05 2005-06 2006-07 2007-08 Source : Inventory turnover ratio 13.6 26.5 17.8 34.0 10.07 Number of days 360 360 360 360 360 Number of days for Inventory 40 Days 26 Days 20 Days 11 Days 34 Days

Published annual reports of Sujala Pipes Private Limited from 2004 to 2008.

Analysis : In the year 2003-2004 the holding period was 40 days, 26 days in 2004-2005, 20 days 2005-2006, 11 days in 2006-2007 and 34 days in 2007-2008. Interpretation : Table 4.3 shows the inventory holding period of through out under the study in the year 2006-2007 the inventory was sold within 11 days, it is less period compared to other year. Graph Showing Holding Period of Inventory.

Holding Period of Inventory

34

40

2003-04 2004-05 2005-06 2006-07

11 20 26

ST. MARYS P.G. COLLEGE,

2007-08

Working Capital Management

Figure 1.7:Graph Showing Holding Period of Inventory. The above graph showing changes in Holding period of inventories of Suijala Pipes Private Limited. Change in Sales and Inventory Table1.8: Showing change in Sales and Inventory of Sujala Pipes Private Limited. (Amount in Rs.) Particulars 2003-04 Sales 635788959 Inventory 31232858 Change in Sales % 100% Change in 100% Inventory % 2004-05 551477486 10282747 86.7 32.9 2005-06 369891220 31141292 58.17 99.7 2006-07 722171487 11337421 113.5 36.29 2007-08 452109721 1274835 71.1 4.1

Source : Published annual reports of Sujala Pipes Private Limited From 2004 to 2008. Note : The percentage in sales and inventory are calculated by taking the year 2004 as base as 100%.

Analysis : Table 4.5 depicts the change in sales and inventory over the period under the study. The percentage of change in sales was high during 2006-2007, when compare to all remaining years. But change in inventory was decreased by 32.9% in 2004-2005 and decreased by 4.1 % in 2007-2008. Interpretation The study of inventory and change in sales, inventory was not improved and sales are improved. This is so because, the sales has increased from 2004-2007 and decreased in the year 2004-2005 and 2007-2008. Graph Showing Changes in Sales and inventory.

ST. MARYS P.G. COLLEGE,

Working Capital Management

Figure1.8: Graph Showing Changes in Sales and inventory The above graph showing changes in sales and inventory of Sujala Pipes Private Limited. Discuses the Liquidity position of Sujala Pipes Private Limited. Introduction : The liquidity position of Sujala Pipes Private Limited is analyzed by calculating Current ratio, Quick Ratio, Absolute Quick ratio. Current Ratio Current ratio to measure the firm's short-term solvency of indicates the availability of current assets in rupees for every one of current liability. A ratio greater then is means that the firm has more current assets than current liabilities. Current Assets ------------------------Current Liabilities (Amount in Rs.) Particulars Current Assets 2003-04 98853028 2004-05 83659949 74108180 1.13 2005-06 91234239 54386365 1.67 2006-07 109819965 66889329 1.64 2007-08 107266308 63664166 1.68

Current Ratio =

Table1.9: Showing of Current Ratio of Sujala pipes Private Limited.

Current liabilities 93589996 Current Ratio 1.06

Source : Published annual reports of Sujala Pipes Private Limited From 2004 to 2008. The calculated current ratio indicates the proportion of current assets to current liabilities in all years is below than the standard ratio (2: 1). Analysis ST. MARYS P.G. COLLEGE,

Working Capital Management The calculated current ratios are 1.06% in 2003-2004, 1.13% in 2004-2005, 1.67% in 2005-2006, 1.64% in 2006-2007 and 1.68% in 2007-2008. Since the ratio is less than its standard in all the years the short-term financial position of the company is not satisfactory.

Interpretation Table 1.7 : Shows that the firm calculated current ratio is less than standard ratio (2: 1)

in all years from 2003-2004 to 2006-2008. Current ratio not indicates sufficient level of investment in current assets in all years.

Graph Showing Current Ratio .

Current Ratio

1.68

1.06 1.13

2003-04 2004-05 2005-06 2006-07

1.64

2007-08

1.67

Figure1.9 : Graph Showing Current Ratio . The above graph showing Current Ratio of Sujala Pipes Private Limited. Liquidity Ratio Liquid ratio indicates that a relationship between quick (or) liquid assets and current liabilities. An asset is liquid if it can be converted in to cash immediately (or) reasonable soon with out a loss of value. Quick (or) Liquid Assets ST. MARYS P.G. COLLEGE,

Working Capital Management Liquidity Ratio = -------------------------------------------Current Liabilities

Table 1.10:Showing of Liquidity ratio of Sujala pipes Private Limited. (Amount in Rs.) Particulars Current Assets 2003-04 67620170 2004-05 73377162 74108180 0.99 2005-06 60092947 54386365 1.10 2006-07 98482544 66889329 1.47 2007-08 105991472 63664166 1.65

Current liabilities 93589996 Current Ratio 0.72

Source : Published annual reports of Sujala Pipes Private Limited from 2004 to 2008. Analysis : The calculated liquid ratio is 0.72% in 2003-2004, 0.99% in 2004-2005 1.10% in 2005-2006, 1.47% in 2006-2007 and 1.65% in 2007-2008. The increase from 2005-2006 and it continued to 2007-2008. Interpretation The liquid ratio is 0.72% in 2003-2004, 0.99% in 2004-2005,1.10% in 2005-2006, 1.47% in 2006-2007 and 1.65% in 2007-2008. In the entire initial the company liquid ratio is not satisfactory from Second year onwards the company maintained sufficient amount of liquid assets. Graph Showing Liquidity Ratio

Liquidity Ratio

1.65

0.72 0.99

2003-04 2004-05 2005-06 2006-07 2007-08

1.47

1.1

ST. MARYS P.G. COLLEGE,

Working Capital Management

Figure1.10 : Graph Showing Liquidity Ratio The above graph showing liquidity position of Sujala pipes Private Limited. Absolute Liquid Ratio Since cash is most liquid asset, a financial analysis may examine the ratio of cash and its equivalent to current liabilities. Trade investment on marketable securities are equivalent to cash therefore, may be including in computation of its ratio. Absolute Liquid Assets Absolute Liquid Ratio = --------------------------------------Current Liabilities Table 1.11: Showing of Absolute Liquid Ratio of Sujala pipes Private Limited. (Amount in Rs.) Particulars Absolute Liquid Assets Current liabilities Absolute Liquid Ratio 2003-04 455855 93589996 0.5 2004-05 671031 74108180 0.9 2005-06 480195 54386365 0.8 2006-07 638869 66889329 0.9 2007-08 3131008 636641566 0.05

Source : Published annual reports of Sujala Pipes Private Limited from 2004 to 2008. Absolute liquid ratio market cash in hand and at bank and marketable securities or temporary investments. The acceptable norm of this ratio is (0.5:1) i.e., Rs 1/- worth absolute liquid asset or considered adequate to pay Rs. 21- worth. Current liabilities in time as all creditors are not expected to demand cash at same time and then as may also be realized from debtors and inventory. Analysis The calculated absolute liquid ratios are 0.5 in 2003-2004,0.9 in 2004-2005, 0.8 in 2005-2006,0.9 in 2006-2007 and 0.05 in 2007-2008. Interpretation ST. MARYS P.G. COLLEGE,

Working Capital Management In all the years the firm calculated cash ratio is higher than the acceptable standard ratio (0.5:1) with Indicates the firm has been maintaining sufficient level of cash to meet its day to day obligations.

Graph Showing Absolute Liquid Ratio

Absolute Liquid Ratio

0.05 0.9

0.5

2003-04 2004-05 2005-06 2006-07 2007-08

0.9 0.8

Figure1.11 : Graph Showing Absolute Liquid Ratio The above graph showing liquidity position of Sujala pipes Private Limited.

ST. MARYS P.G. COLLEGE,

Working Capital Management

Creditor conversion period Introduction To analyzed the proposition of creditor in current liabilities and to find out the period of credit avail by calculating creditors conversion period in Sujala Pipes Private Limited. Creditor Conversion Period Creditor Conversion Period = ---------------------------------------------- * 360 Purchases Table1.12:Showing Creditors conversion period of Sujala Pipes Private Limited : (Amount in Rs.) Year 2003-04 2004-05 2005-06 2006-07 2007-08 Source Creditors 89122322 72133509 52129639 64385729 59989566 Purchases 497428588 401895122 309954586 538252538 311669790 Days 65 Days 65 Days 60 Days 43 Days 69 Days

Published annual reports of Sujala Pipes Private Limited from 2004 to 2008.

Analysis Table 4.4 shows the creditors conversion period for 65 days in the year 20032004, 65 days in the year 2004-2005, 60 days in the year 2005-2006, 43 days in the year 2006-2007 and 69 days in 2007-2008. Interpretation The ratio represents the average number of days taken by the firm to pay its creditors. In the year of 2003-2004 was 65 days, and it was stable in 2004-2005 and it was decreased to 60 & 43 days in the years 2006 & 2007 and 69 days in 2007-2008. The liquidity position of the firm and pays its creditors are not good.

ST. MARYS P.G. COLLEGE,

Working Capital Management

Graph Showing Creditors Conversion Period

Creditors Conversion Period

69

65

2003-04 2004-05 2005-06 2006-07

43 60

60

2007-08

Figure 1.12: Graph Showing Creditors Conversion Period The above graph showing liquidity position of Sujala pipes Private Limited.

ST. MARYS P.G. COLLEGE,

Working Capital Management

FINDINGS
The following are the findings of Sujala pipes Private Limited with regards to working capital Management from 2004 to 2008. The investment in inventory gradually decreases from 31.6% to 1.2% during 20042008. The amount of sundry debtors has been increased from 31 % of total current assets to 37% during 2003-2005, there was a decrease in 2006 ie.; 17%, again decline in 2006-2008 i.e. 0.4% of total current assets. Cash and bank balance shows the gradual decrease and increase during 2003-2004 to 2004-2005 i.e. from 0.5% to 0.8% of total current assets. The cash and bank balance during 2006-2007 was 0.99% and 0.05% of total current assets in the year 2007-2008. Sundry creditors have been decreased during the period under study from 97% to 90% of the total current liabilities. The net increase in working capital during the year 2003-2007 i.e., Rs. 5263029 to 43602141. Cost of sales also decreased for through out the period except in the year 2007. The calculated current ratio is 1.06 in 2003-04 1.13 in 2004-05, in 2006 and 1.64 in 2006-07 and 1.68 in 2007-2008. 1.05 in 2005-06. Since the ratio is less than its standard in all the years, the shortterm financial position is not satisfactory. ST. MARYS P.G. COLLEGE,

Working Capital Management The liquid ratio is 0.72 in 2003-2004, 0.99 in 2004-05, 1.10 in 2005-06, 1.47 in 2006-07 and 1.65% in 2007-2008.

Except 2003-2005 the liquid ratio was more than standard ratio. Therefore liquidity position of the organization is satisfactory.

The calculated cash ratios are 0.5 in 2003-2004, 0.6 in 2004-05, 0.5 in 2005-06, 0.99 in 2006-07 and 0.29 in 2007-2008. It is indication that the firm has not maintaining sufficient level of cash to meet its day-to-day obligations.

The calculated debtors turnover ratio has decreased over year under study i.e. from 20.5 times in 2003-2004 to 17.7 times in 2004-2005 and there was an increase in 2005-2006 i.e. from 17.7 times to 23.7 times and 15.5 times in 2006-2008. The firm efficiency has increased in controlling of the amount of debtors.

The investment in receivables has been considerable increased from 2003- 2005 i.e., 18-21 and then declined in the year 2005-2006 ie., 15 and increase 24 in 20062008. This shows management efficient in controlling the investment in receivables in the year 2005-2006 when compares to previous years.

Cash and bank balances vary between 8.6% and 14.8% in Sujala Pipes. However the practice of holding cash balance in relation to net working capital indicate poor cash management in Sujala Pipes.

The total investment in inventory has been decreased from 2003-2004 to 20072008. It indicates poor performance in inventory management. This is due to low investment in raw materials and low production of finished goods during 20072008.

ST. MARYS P.G. COLLEGE,

Working Capital Management

SUGGESTIONS
Cost of sales in Sujala Pipes Private Limited decreased by 5.4% in 2004- 2005 and 35.3% in 2005-2006 and increased by 20% and decreased by 25% in 2007-2008 when compared with the cost of sales in 2007 to 2008. The increase is mainly because of increase in purchase of raw materials, direct labour and other manufacturing expenses and selling and administration expenses. Hence it is suggested to have a better control on the amount of above expenses. The cash ratio of the company is not satisfactory throughout the period under study, because in all the years cash ratio is too below than the standard. Hence it is suggested to improve cash and bank balance to meet day-to-day obligations. It is suggested to make investments in inventories and to improve the performance in inventory m

ST. MARYS P.G. COLLEGE,

Working Capital Management

CONCLUSION
I feel that M/s Sujala Pipes has very good reputation in the market. It is financially very strong. Further professionalization of management in handing the financial statements may be encouraged. The company's overall position is very much satisfactory. I have realized that I have undergone good experience in the project period.

ST. MARYS P.G. COLLEGE,

Working Capital Management

BIBLIOGRAPHY

BOOKS MANAGEMENT ACCOUNTANCY

AUTHORS K.SHARMA & S.K.GUPTHA 4th Edition

WORKING CAPITAL MANAGEMENT

V.K.BHALLA 7th Edition

FINANCIAL MANAGEMENT

I.M.PANDEY 9th Edition

FINANCIAL MANAGEMENT

PRASANNA CHANDRA 3rd Edition

WORKING CAPITAL MANAGEMENT

MOHAN RAO 2nd Edition

Web sites: www.nandipipes.com

ST. MARYS P.G. COLLEGE,