SOMASHEKARAIAH.

M REG NO: 10QZCMA095 PROJECT SYNOPSIS STUDY ON WORKING CAPITAL MANAGEMENT

1. THEORETICAL BACKGROUND OF TOPIC

A firm contains input to make a finished product, which is sold to make a profit. These sales proceed are re-invested to make such products and generate further profits. The problem is, there is a lag between the time a finished product is ready and the time its sale proceeds are realized. If a company waited till their products come in, its plant and machinery would lie idle until this amount accrues to it. So it conjures smooth operations through this time lag, every business activity make funds. This is its Working Capital that can generate more revenues from a special amount, Working Capital than others, will eventually be more profitable, better cash flows. CONCEPTS OF WORKING CAPITAL: There are two concepts of Working Capital 1. Gross Working Capital 2. Net Working Capital The term Gross Working Capital also refers to as Total of Current assets. The term Net Working Capital is defined two ways 1. It is the difference between Current assets and Currentliabilities. Alternatives definition is proportion of firms Current assets which is financed with long-term funds 2. The task of the financial manager is managing Working Capital efficiently, to ensure sufficient liquidity in the operations of the enterprise. The liquidity of the business firm ismeasured by its ability to satisfy short term obligations as they become due.The basic measures of a firm over all liquidity are: 1. Current Ratio2. Quick Ratio3. Net Working CapitalNet Working Capital is a measure of liquidity is not very useful to compare, performance of different firms, but it is useful for internal control.

2. Statement of problem:
In the recent days, many of the Small and Medium Enterprises (SMEs) are not able to maintain working capital requirements effectively. Working capital plays a major role in the overall performance of the any organization. It is a managerial accounting strategy focusing on maintaining efficient levels of both components of working capital, current assets and current liabilities in respect to each other. Hence, the study focuses on working capital management at x ltd.

3) REVIEW OF LITERATURE:
This study is conducted by Kesseven Padachi to analyses the Small businesses are viewed as an essential element of a healthy and vibrant economy. They are seen as vital to the promotion of an enterprise culture and to the creation of jobs within the economy (Bolton Report, 1971). Small Medium-Sized Enterprises (SMEs) are believed to provide an impetus to the economic progress of developing countries and its importance is gaining widespread recognition. Equally in Mauritius the SMEs occupy a central place in the economy, accounting for 90% of business stock (those employing up to 50 employees) and employing approximately 25% of private sector employees (Wignaraja and ONeil, 1999; CSO, 2003; NPF, 2004). Storey (1994) notes that small firms, however, they are defined, constitute the bulk of enterprises in all economies in the world. However, given their reliance on short-term funds, it has long been recognized that the efficient management of working capital is crucial for the survival and growth of small firms (Grablowsky, 1984; Pike and Pass, 1987). A large number of business failures have been attributed to inability of financial managers to plan and control properly the current assets and current liabilities of their respective firms (Smith, 1973). Working capital management (WCM) is of particular importance to the small business. With limited access to the long-term capital markets, these firms tend to rely more heavily on owner financing, trade credit and short-term bank loans to finance their needed investment in cash, accounts receivable and inventory (Chittenden et al, 1998; Saccurato, 1994). However, the failure rate among small businesses is very high compared to that of large businesses.

Studies in the UK and the US have shown that weak financial management - particularly poor working capital management and inadequate long-term financing - is a primary cause of failure among small businesses (Berryman, 1983; Dunn and Cheatham, 1993). The success factors or impediments that contribute to success or failure are categorized as internal and external factors. The factors categorized as external include financing (such as the availability of attractive financing), economic conditions, competition, government regulations, technology and environmental factors. While the internal factors are managerial skills, workforce, accounting systems and financial management practices. The working capital meets the short-term financial requirements of a business enterprise. It is a trading capital, not retained in the business in a particular form for longer than a year. The money invested in It changes form and substance during the normal course of business operations. 2nd review literature Profitability Case Of Pakistani Firms Abdul Raheman and Mohamed NasrMany researchers have studied working capital from different views and in different Environments. The following ones were very interesting and useful for our research: (Eljelly, 2004) elucidated that efficient liquidity management involves planning and Controlling current assets and current liabilities in such a manner that eliminates the risk Of inability to meet due short-term obligations and avoids excessive investment in these Assets. The relation between profitability and liquidity was examined, as measured by Current ratio and cash gap (cash conversion cycle) on a sample of joint stock Companies in Saudi Arabia using correlation and regression analysis. The study found That the cash conversion cycle was of more importance as a measure of liquidity than The current ratio that affects profitability. The size variable was found to have significant This study is conducted is Working Capital Management and

Effect on profitability at the industry level. The results were stable and had important Implications for liquidity management in various Saudi companies. First, it was clear that There was a negative relationship between profitability and liquidity indicators such as Current ratio and cash gap in the Saudi sample examined. Second, the study also Raheman & Nasr revealed that there was great variation among industries with respect to the significant Measure of liquidity. (Deloof, 2003) discussed that most firms had a large amount of cash invested in Working capital. It can therefore be expected that the way in which working capital is Managed will have a significant impact on profitability of those firms. Using correlation And regression tests he found a significant negative relationship between gross Operating income and the number of days accounts receivable, inventories and Accounts payable of Belgian firms. On basis of these results he suggested that Managers could create value for their shareholders by reducing the number of days Accounts receivable and inventories to a reasonable minimum. The negative Relationship between accounts payable and profitability is consistent with the view that Less profitable firms wait longer to pay their bills. This is 3trd literature review this study is conducted by Umara Noreen The Theoretical Underpinnings The new international interface has hastened the multinational corporation for the need of improved working capital management practices. Practitioners believe that international working capital management should be dealt with as extensively as domestic working capital management (Collins and Frankle, 1985). Accordingly, the purpose of working capital management is to manage the firms current accounts to attain a desired balance between profitability and risk. To enhance profitability, Hill and Sartoris (1992) suggest reducing time value costs (the opportunity cost of the float), credit losses due to the inability to collect payments, transaction costs of moving cash within and between other countries,and losses on foreign exchange conversions.

The objective function identified by Hill and Sartoris suggests several areas of research in international working capital management, including those covered in the current survey: foreign exchange risk management activities, international cashmanagement operations, and international cash collections and credit management practices. The management of working capital is important to the financial health of businesses of all sizes. The amounts invested in working capital are often high in proportion to the total assets employed and so it is vital that these amounts are used in an efficient and effective way. (Padachi, 2006) 162 International Research Journal of Finance and Economics - Issue 32 (2009) Working capital starvation is generally credited as a major cause if not the major cause of small Business failure in many developed and developing countries (Rafuse, 1996). The success of a firm depends ultimately, on its ability to generate cash receipts in excess of disbursements. The cash flow problems of many small businesses are exacerbated by poor financial management and in particular the lack of planning cash requirements (Jarvis, 1996).The management of working capital is important to the financial health of businesses of all sizes. The amounts invested in working capital are often high in proportion to the total assets employed and so it is vital that these amounts are used in an efficient and effective way. A CASE OF ALBA COUNTY COMPANIES doing is research of literature of review in the guidance of Adina Elena DnuleiuMany previous researches have indicated the relations between working capital management and profitability of a company in different environments. Annales Universitatis Apulensis Series Oeconomica, 12(1), 2010366Shin and Soenen (1998) used a sample of 58,985 firms years covering the period 1975-1994 in order to investigate the relation between net-trade cycle that was used to measure the efficiency of working capital management and corporate profitability. In all cases, they found a strong negative relation between the length of the firms net-trade cycle and its profitability.Deloof (2003) investigated the relation between working capital management and corporate profitability for a sample of 1,009 large Belgian nonfinancial firms for the period 1992-1996. The result from analysis showed that there was a negative gap between profitability that was measured by gross operating income and cash conversion cycle as well number of days accounts receivable and inventories. He suggested that managers can increase corporate profitability by

reducing the number of days accounts receivable and inventories. Less profitable firms waited longer to pay their bills.Lazaridis and Tryfonidis (2006) have investigated the relation between working capital management and corporate profitability of listed company in the Athens Stock Exchange. A sample of 131 listed companies for period of 2001-2004 was used to examine this relationship. The result from regression analysis indicated that there was a statistical significance between profitability, measured through gross operating profit, and the cash conversion cycle. From those results, they claimed that the managers could create value for shareholders by handling correctly the cash conversion cycle and keeping each different component to an optimum level. This also conducted by research An Empirical Study across Industries in Thailand B.A Ranjith Appuhami the chief financial officers of most companies spend most of their time and effort on day-today working capital management. Still, due to the inability of financial managers to properly Plan and control the current assets and current liabilities of their companies, the failure of a Large number of businesses can be attributed to the inefficient working capital management (Smith, 1973). Though it takes little attention, the importance of working capital management Can be seen over previous years. Over twenty years ago, Largay and Stickney (1980) reported that the bankruptcy of W.T. Grant, a nationwide chain of department stores that should have been anticipated because the Corporation had been running a deficit cash flow from its operations for eight of the last ten Years of its corporate life. As part of a study of the Fortune 500s financial management Practices, Gilbert and Reichert (1995) have found that account receivable management Models are used in 59% of these firms to improve working capital management projects, While, inventory management models were used in 60% of companies. Smith (1973) has

Identified eight major theoretical approaches taken towards the management of the working Capital. He stresses the need for the development of a viable model with the dual finance goals Of profitability and liquidity, and argues that only such models will assist practicing financial Managers in their day-to-day decision-making. Over the years, many researchers have focused on determining the optimal level of each Component working capital. Gentry (1979) found that the working capital literature is rather Limited and that the management of short term resources is not understood too well by Academicians. The linkage of profitability to capital structure is seen differently by the two theories presented by Myers in 1984. These are the Static Trade-off Theory (STT) and Pecking Order Theory (POT). STT postulates that a companys capital structure is based on a target debt-equity ratio which is arrived at by evaluating the costs and benefits linked to level of debt. Determinants identified include tax impact, agency costs, financial distress costs etc. Onthe other hand, POT holds that companies base their capital structure on a hierarchy of decisions. They first use internal funds (retained earnings) for their financing needs. If fund requirements For investment projects cannot be fully met from internal sources, a company goes for debt financing, while issuing equity would be considered as a last option for external financing. This means PAKISTAN BUSINESS REVIEW OCTOBER 2010Research Impact of Working Capital Management and Capital Structure on Profitability448that as per POT, companies operating profitably, would generally not resort to debt financing for their new projects, since they Have sufficient internal funds available for the purpose. On the other hand, according to STT, profitable companies would prefer raising debt financing to avail the benefit of tax shield on borrowed f u n d s. T h u s, S T T s u p p o s e s a d i r e c t r e l a t i o n s h i p between profitability and leverage, while POT expects an inverse linkage between them. Moreover, STT argues that larger size companies would show greater preference for debt financing due to lower

Chances of going bankrupt. This is supported by the assumption that larger firms are more diversified, which also reduces the bankruptcy probability (see for details Titman and Wessels 1988). The signaling theory which was first presented by Ross(1977) argues that raising debt can be taken as a signal to the capital markets that a company is confident that its future net cash flows after debt servicing, are going to be positive. This is because a company is contractually bound to service its debt i.e. pay interest and repay principal from its cash flows.

4) Scope of the study

The scope of the present study on composes with in its fold a theoretical frame work of working capital management in general analysis of working capital trends relationship of working capital to sales, liquidity of working capital analysis of management of working capital finance in the select unit, the period covered by the study in five years.

5) OBJECTIVE OF THE STUDY

To determine the operating cycle of the unit To know the future need of working capital in the running organization To know whether the company maintain a large size of inventory for efficient and smooth production and sales operation To analysis the working capital management of the company

6) Methodology of research
6.1 sample and data collection Primary Primary data will be collected from the company employees. The sample size for the survey will be limited to 50 respondents. Secondary The secondary data will be collected from the company annual reports, existing studies and books etc.

6.2 tools and data analysis The data is analysis help of statistical tools such as charts, graphs, tables, using in ratio also etc.

7) LIMITATION OF THE STUDY

An account of shortage of time money and energy this is confined Some datas are not given because of confidential Due to lack of practical knowledge I am unable to research in an in depth manner.

8) The outcome of the projects

The cost of the working capital is more in x company ltd Current assets are not converted as cash immediately. They are seen as vital to the promotion of an enterprise culture and to the creation of jobs within the economy. The result from analysis showed that there was a negative gap between profitability that was measured by gross operating income and cash conversion cycle as well number of days accounts receivable and inventories.