Working capital management at HBL POWER SYSTEMS INTRODUCTION

Working capital management is the study of short term financial requirement of a firm. It can be also said that working capital management is the difference between the current assets and current liabilities. Working capital management is concerned with the problems that arise in attempting to manage the current assets, the current liabilities and the interrelationship that exists between them.

The goal of working capital management is to manage the firms current assets and current liabilities in such a way that a satisfactory level of working capital is maintained. The current asset should be large enough to cover its current liabilities in order to ensure a reasonable margin of safety. The duration plays an important role in working capital management which in turn depends on the operations. Effective management control plays a vital role.

Therefore, a detailed study regarding the working capital management in HBL Power Systems has been done to consider its effectiveness and shortcoming identified and suggestions are to be made.

INDUSTRY PROFILE AND COMPANY PROFILE

DC Power systems are used across the world for a variety of application where the traditional power supply system cannot be sustained/ supported. The domains that are encompassed in the DC power systems vary from Telecommunications,

Aviation, Rail coaches and signaling to Oil Refineries, Power generating stations, Oil drilling and pipelines. These applications have grown significantly in the last two decade due to the embracement of newer technology and also because the conventional

power sources are available only in a limited domain, beyond which the reliance on DC / alternative Power systems is unavoidable. With the march of technology and its blending with the industrial applications there is a need for an efficient and reliable power supply sources at all times and place. DC Power systems provide a back up /

alternative source of power for running and maintaining applications wherein loss of power supply is critical. There is a need for the power supply in remote and far-flung areas and at such places the dependence is on DC power sources is complete DC power systems are also required in mobile (non-stationary) applications like Rail coaches, Aviation etc. In these applications the usage of conventional sources of power / electricity is not possible and DC power supplied thru batteries is to be relied

upon. Defence applications too, require power for communications, aviation and naval application like propulsion of torpedoes. The application for DC power also finds place in Defence Research establishments like NSTL (Naval Science and Technological

Laboratory), DRDO (Defence Research and Development Organization, DRDL (Defence Research and Development Laboratory amongst others.

The Company is manufacturing specialized batteries and electronics products. The end users of its products are in various sectors i.e. Communications, Railways, Defense, Oil and Natural Gas, Petroleum, Steel, General industry, etc. Most of these segments are core sector of countrys economy. Given the background of inadequacies and shortcomings

associated with the power supply situation, every end user requires reliable, consistent and clean power source for running the establishments. Thus back up power requirements are rapidly growing to cater the increasing requirements of the above segments. Further advent of latest technologies deployed by many sectors like Telecom, Info com, Information

technology, rail and road transport and manufacturing units having sophisticated computer numerically operated equipment requires continuous and reliable power supply which

necessarily has to be met through to back up power only. In remote areas where the mains power supply is not at all available i.e. railways, defense, communications, oil exploration etc. have to depend on back up power

supply only. Thus this sector of business all over the world works out to several billion US dollars. Among these countries like China, India, and South East Asian countries where the requirements of rapidly growing population is also very high. The segments in which we

are in business the annual requirement is more than Rs. 3,000 crores having compound growth potential of 10-12% annually. Being in a very vital sector of business and past track record from last 20 years the future for this sector is quite encouraging. Market demand for the products is increasing very rapidly. Liberalized policies of Government of India from 1991 onwards opened up foreign direct investments in several sectors i.e. Telecom, Infocom, IT, Transport, etc. This has achieved very satisfactory level of foreign direct investments. Financial sector reforms

also will contribute for further growth of economy in several sectors in the years to come. This will increase the demand for technology driven sectors where the usage of back up power is very essential which will be a catalyst for the growth of the companys business both in terms of volume and value, which will contribute to consistent growth of business of all the products including electronics products. NiCad batteries Extracts from Investigation on Storage Technologies for Intermittent Renewable Energies: Evaluation and recommended R&D strategy-Nickel batteries dated 2003-06-23 by Investire Network [Project funded by European Community under the 5th frame work programme (1998-2002)] Nickel cadmium (NiCd) batteries have been in industrial production almost as long as lead acid batteries. The NiCd battery of type vented pocket plate (PP) was invented by Jungner in 1899 and is still used with the same design today. NiCd batteries for industrial applications are today a niche product. The main applications for industrial NiCd batteries are railroad service, switchgear operation, telecommunications, emergency lightning and in uninterruptible power supply. Industrial NiCd-batteries of more modern weight and volume efficient designs than the pocket plate are also used in modern trains, aircrafts, electrical vehicles (EV) and hybrid electrical vehicles (HEV). Industrial NiCd cells are designed as vented prismatic cells with positive and negative plates containing the positive and negative active materials. There are four different types of vented industrial NiCd batteries commercially available. Pocket plate batteries Fibre plate batteries

Sinter plate batteries Sinter/plastic bonded plate batteries

Pocket plate batteries:- Pocket plate batteries are the oldest and least expensive type with a very reliable and long-life cell design that can stand severe mechanical and electrical abuse. Sinter Plate battery:- Sinter Plate battery was invented 1932 by Shlecht and Ackermann. They have superior high discharge and low temperature performance but are the most expensive battery due to high manufacturing cost and high nickel content. The gap between the superior but high cost and size limited (<100Ah/cell) sinter battery and the low cost but bulky and heavy PP battery was filled in the eighties by the development of fiber plate batteries and later the plastic bonded electrode (PBE) batteries.

Fiber plate NiCd (FNC) batteries:Fiber plate NiCd batteries were developed for electrical vehicles (EV) applications by Deutsche Automobile sellschaft mbGh (DAUG) and are today available for general industrial applications.

Sinter/plastic bonded plate batteries: In sinter/PBE batteries the positive plates are made with sinter plate technology and the negative plates are made with plastic bonded technology. The main conventional applications for vented NiCd batteries of type pocket plate,

sinter/PBE and fiber are used in applications of industrial nature. Examples are railroad service, switchgear operation telecommunications, uninterruptible power supply and

emergency lighting. Fibre plate and sinter/PBE NiCd batteries are used in trains and

electrical vehicles. Fibre plate batteries are also used in aircrafts. Vented sintered plate NiCd batteries are used in applications requiring high power discharge service such as aircraft turbine engine and diesel engine starting and other mobile and military equipment. Sealed NiCd batteries are used in portable equipment, like toys, phones, camcorders, computers and power tools. The batteries are also used in military equipment and in emergency lightning, alarms, and memory back up.

COMPANY PROFILE HBL Power Systems Limited was originally incorporated in August 29, 1986, under the name and style of SAB NIFE Power Systems Limited by Dr.A.J.Prasad. It received the certificate to commence business on September 22, 1986. Hyderabad Batteries Limited (HBL) an entity of Dr. A.J. Prasad (Promoter) acquired the status of a co-promoter along with SAB NIFE AB, Sweden as the joint venture partner and financial collaborator. The Company was setup with an object to manufacture various types of batteries and electronic products. Commercial production commenced in August 1988. In April, 2000 the Company merged with itself HBL Limited (one of the promoter of SAB NIFE Power Systems Limited) along with another associate company Pinaki Technologies Limited. The merger was with an objective of complementing the then existing product range and to establish a manufacturing facility for switch mode rectifiers at Kothur, Mahaboobnagar District Andhra Pradesh. Post merger to represent the new focus of the company it was renamed as HBL NIFE Power Systems Limited During 2001-02 the company acquired controlling interest in Compact Power Sources Private Limited, which was engaged in manufacturing of Cap Lamps and Batteries for mining industry. The said company was eventually amalgamated /

merged with HBL Power Systems Limited vide court order in February 2004.

HBL NIFE manufactures large capacity nickel cadmium batteries and power electronics equipment like rectifiers, battery chargers and uninterrupted power systems. BOARD OF DIRECTORS Dr. A.J. Prasad, Mr. Ashok Nagarkatti, Ms. Kavita Prasad, Mr. P. Ganapathi Rao, Dr. Bernd T. Gans, Dr. (Smt.) D. Chitra Rao : : : : : : Chairman & Managing Director Director Director Director Director (IDBI nominee Director)

MANAGEMENT AND ORGANIZATION STRUCTURE :

Focus Areas of Business Presently, the thrust areas of the Company to which it caters are: Communications / Telecom D e fe n s e R a ilw a y s Power Petroleum, Oil &Gas Steel Non-Conventional Energy (Solar) Uninterrupted Power Supply Systems MARKET DIVISIONS OF HBL POWER SYSTEMS Ltd. A) Industrial batteries : In the Indian market substantial growth is being noticed in almost all the segments in which the Companys products are marketed. The industrial battery market currently is Rs.1,200 to 1,500 crores with 20% annual growth in the coming years. i. Telecom Sector : This sector is experiencing maximum growth in volume and reach from a tele-density of less than 5 per hundred at the turn of the

century, it has almost crossed 10 per 100 and there is a clear target of

reaching 25 per 100 in three years. This translates in to a growth of nearly 100% year by year for next 3 years. With the foreign direct investment (FDI) caps liberalized, major consolidation in the market already taken place and the global leaders in technology, equipment and project technology are directly undertaking the expansion of the projects, thereby communications sector will be most stable

and effective in terms of the future growth. Nearly 2% of the telecom capacity expansion project costs account for batteries and stand by power. With a cost approximately Rs.4,000 over line, the battery purchase in the telecom sector will exceed Rs.1200 corers in the ii. Power Sector: The power segment is a major user of batteries and DC power systems right from the main generating plants, power supply back up to switch yards, next 2 to 3 years.

auxiliaries, material handling, UPS, control and instrumentation;

substation and switch gears in generation, transmission and distribution. The present countrys installed capacity of 112,000 MW is to cross to MW 200,000 by 2012. The advanced power development and reforms programme

(APDRP) of government already under implementation is helping to add capacity / improve generation even in existing plants apart from setting up of new green field projects. The Electricity Act, 2003 has liberalized the norms to ensure private power plants can be quickly implemented in short gestation periods. The expansion capacity target thus will have 20% private projects and 25% through reforms and modernization. As the Battery back up in the main power plant areas need to be highly reliable, nickel cadmium batteries find extensive use in this segment and 25 to 10

30% yearly growth is expected for these alkaline batteries from this

segment.

With the additional investments planned in this sector Rs.200 crores per annum of the battery purchase is envisaged to cater to the growth apart from the

replacement demands for existing plants. B) Other Industrial Segments

i. Fast growth is expected in the Solar Power (Non-conventional energy)

segment

to achieve electrification of of green, non-polluting power.

remote and non-grid areas as well as to encourage use

As each solar street light, home light and power plant needs batteries to store and supply the power, the potential in this area is also substantial with the Government planning to electricity 100,000 villages through the MNES programmes and private enterprises also coming into the sector. Growth of 22 to 25% per annum is expected in this segment. iii. The other high growth industrial segment is the UPS. : The large growth in automation and IT in all spheres is driving the UPS segment that is growing by 25-30% p.a. The heart of each UPS is a battery bank which keeps the stand-by power stored. The value of batteries in an UPS range from 20-50%. The UPS market today is more than Rs.1,000 crores per annum in the enterprise segment. iii. Road transport sector is also a growing segment where the company is making a selective and focused entry to supply high quality pure lead tin batteries to

the busses of RTCs. The Company is also working with developers of electrical

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vehicles to design advanced technology batteries for these future products. iv. Railways: The Railways segment is growth well with expansion in tracks increasing requirement of batteries for train and more

and routes. This translates into

lighting, AC coaches, signaling and communications. With more

types of batteries being approved by RDSO, the growth in this segment for the Company is more than 30% per annum. v. Defence : The defense segment has been a prized customer for the Company with several specialized, tailor made batteries being supplied to the Army, Navy and the Air Force. The Company is most dependable supplier to Defence for critical

application areas like torpedoes, missiles, aircraft starting, ground power units etc. where no other major manufacturers can cater. Specially designed Silver Oxide

Zinc, Nickel Cadmium Sintered Plate, Lithium and other chemistries are used for such defense applications. The Company has a niche in this market and with growing defense expenditure and entry of private sector now being altered, this segment is a valuable business and growth area for the Company. C) Export Markets The global market for batteries is also growing by almost 10% with much higher growth in the Asia Pacific region. Increases in capital spending and in manufacturing enterprises in the industrializing parts of the world are driving growth. The total battery market globally is envisaged at US $ 43 bn out of which 30% is considered to be in non-automotive applications segment. 12 In the developed

economies, non-lead acid (alkaline) rechargeable batteries are out pacing the lead acid secondary batteries. HBL NIFEs technology driven Nickel cadmium batteries are very well here to meet this trend as the results already show. With growing acceptance of the Companys NiCad products all over the world, consistent

growth is expected and the company is planning to meet this increasing demand through capacity expansion, own overseas facilities, more effective dealer / reselling customer net work and product / technology improvement D) Electronics Products The Company is an established supplier of industrial chargers, distribution boards etc. to industrial customers all over India and overseas. Several Project programmes.

Customers prefer system suppliers for complete DC Power Systems and the Company is well placed to cater to this demand. Integrated Power Supply

systems (IPS) which are multi voltage charging and power supply systems are very popular with the Railways and the Company is leading supplier of this product. Railway signaling is a major growth area, which the company is focused to capitalize. The Railways have allocated a special budgetary fund of Rs.5,000

crores to upgrade signaling systems in 5 years apart from their regular budgets. Safety becoming a critical aspect in railway operations, the investment in this area will increase manifold in future. The Company has developed several advanced technology electronics products to cater to this high growth segment. The Company is working closely with IRISET, RDSO and other agencies with development orders and regular orders already coming in for several electronics products like Data loggers, train charting systems, high frequency track circuits, solid state interlocks,

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digital axle counters, etc.

The Company has undertaken execution of railway

signaling contracts on turn key contract basis with supply of batteries and electronics products as a part of the terms of contract. This area will grow very rapidly since the railways have embarked upon the modernization programmes of signaling systems all over the country in a phased manner. This is a substantial

future growth area and also contributes to the diversification / introduction of new technology driven electronic systems in large volumes. E.) Defence Electronics The Company being trusted supplier of various specialized batteries to Defence has been encouraged to develop several electronics products used for electronic warfare, radar, microwave, proximity fuzes, radios, thermal imagers etc. With liberal

investment in R&D, new product development, tie-ups with research institutions and sheer technological enterprise, the Company has been successful in developing advanced electronics products suitable and acceptable to the Defence applications and is poised for assumed growth in this specialized market of limited competition. The highest growth areas of the Company in the next few years will be : i. Telecom: The lead acid battery business in this segment has doubled last financial year and further expected to re-double in two years. The countrywide net work of the Company with dedicated teams for the telecom customers and matching

production capabilities will ensure dominance in this segment. ii. Exports & NiCad Business:

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With the Company being able to establish acceptance and growth from quality buyers from several sectors and Asian countries for its Nickel Cadmium

batteries, very quick growth in this area is assured. This global demand growth of NiCad Batteries will be firmly strengthened by the rising domestic demand for the Power and Oil and gas segments where NiCad batteries are preferred over all other types. With limited competition in

this product area both in India (only two suppliers HBL and AMCO) and overseas (SAFT, Alcad Hoppecke), the future is indeed bright and promising. Increased capacities and with export suited exclusive manufacturing facilities existing

within shortest gestation period will spurt this growth and can double the NiCad business in next two to three years. iii.

Electronics: The thrust and focused attention in the Railway Signaling and ensure high turnover levels for the company in

Defence Electronics Products will the years to come

The Company has wide spread customer base, the top 10 are as under: Sr. No. 1. 2. 3. 4. 5. Name of the Clients Reliance Infocom Limited Motorola India Limited Ministry of Defence Indian Railways SAFT AB

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6. 7. 8. 9. 10.

Integral Coach Factory, Perambur Nokia India Limited Hutchison Essar Telecom Limited Erickson India Limited Bharat Heavy Electricals Limited

The Companys global presence is evident in the fact that the Company is continually expanding its facilities to meet the increasing demand of quality products. High Degree of Customer Satisfaction and increased turnover year after year has further added to the creditability of the organization HBL Power Systems Limited - High Lights A leading player in industrial and specialized batteries, DC Power Systems and other Electronic Products. A technology focused manufacturer of several ranges of specialized application

batteries i.e. Nickel cadmium (Pocket, Fibre, and Sintered Plate), Silver Oxide Zinc, Lithium, Thermal, Lead Acid (VRLA, lead tin, tubular, LMLA) etc. The Customer segment in India include Telecom, Railways, Defence, Power, non-conventional energy (solar), petroleum, oil and gas, uninterrupted power supply systems process and core industrial users. Products are exported to several countries in Asia, Europe and the Americas. Exports are growing at over 40% with increasing business from existing markets / customers as well as from new territories. 16

Apart from Batteries and DC Power Systems (chargers, distribution boards, etc.), the company has developed several advanced electronic products for Indian railways and reached an advanced stage for completion of defense electronics product development. The company has made substantial investments in process development for its core products as well as the new electronic products with exclusive specialist qualified Technology development. man power for in-house

Development orders, approvals and release of commercial orders from railways and defense sectors for some of the signaling and electronic products of the Company as paved the way for additional increase in growth and major diversification in the next few years.

With its country wide sales and effective service net work, the Company is by far the largest supplier in the booming telecom sector as well as for specialized alkaline application battery segments. MAIN OBJECTS OF THE COMPANY To Manufacture, assemble, purchase, import, export and otherwise deal in India or abroad in all types of cells, batteries, energy storage devices, conversion and generation devices, appliances, gadgets, equipments and products, including

power packs, power supplies, generators, solar panels, chargers and subassemblies, components, parts and accessories thereof. To manufacture, assemble, purchase, sell, import, export or otherwise deal in India or abroad in all electrical, electronic, electro mechanical and metallurgical appliances, devices and sub-assemblies, accessories, parts and components thereof.

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To manufacture in India or abroad products based on electrolytic, electrothermal and electro-chemical processes, including sintered products and products

based on powder metallurgy technology. To establish, provide, maintain an operate plants in India or abroad for the extraction, refining and electro plating of metals and alloys by electrolytic processes. To acquire, develop or supply engineering services, know-how, technology, process designs, patents, equipment, plant and machinery in India or abroad for the manufacture and/or supply of all kinds of energy systems, electric or electronic devices and also undertake the provisions of related technical, marketing and engineering consultancy services. To buy, sell, manufacture, refine, manipulate, treat, prepare, import and export and deal in all kinds of chemical, industrial, medical, pharmaceutical compounds, cements,

and other preparations, substances, apparatus, and articles,

oil paints, pigments and varnishes, drugs, dyes and dye-wares, paint and colour grinders, spirits, alcohol and other alkaloids, synthetics and substitutes. To design, manufacture, install, erect, repair, alter, amend, improve, maintain, remove, exchange, replace, import, export, sell, purchase, license, lease, hirepurchase and to act as agents in India or in any part of the world for all types of special purpose industrial machinery, products made-up of composite material, computer hardware, engines, equipment, components and its related accessories and services. To undertake the designing and development of systems and application software either for its own use or for sale in India or for export outside India and to design

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and develop such systems and application software for or on behalf of manufacturers, owners and users of computer systems and digital/electronic equipments in India or elsewhere in the world. To set up and run electronic data processing centers and to carry on the business of data processing, word processing, software consultancy, systems studies, management consultancy, techno-economic feasibility studies of projects, design and development of management information systems, share/debenture issues management and/or registration and share/debenture transfer agency. To carry on the business of manufacturing, producing, generating power from all or any of the available sources such as Thermal, Hydel, Gas, Wind, Cogeneration, Solar, Petroleum or from any other possible sources conventional or

non-conventional and in particular to construct, lay, own, establish, fix and carryout all necessary power stations, cables, wire lines, accumulators, lamps

and works and other elections whatsoever as may be necessary or required for generation, accumulation of power for captive consumption or for distribution,

marketing, supplying of power in India or elsewhere to any of the industries, firms, electricity boards, government of semi government bodies, public or private companies and also for private or public purpose. To act as a Export House and to carry on the business of merchants, traders, manufacturers representatives, commission agents, selling agents, brokers and to export, import, indent, buy, sell or otherwise deal in all kinds of goods, products, articles, merchandise either manufacture by the company or otherwise. QUALITY CERTIFICATION OF THE HBL POWER SYSTEMS Ltd.

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Quality of all its products enjoy high reputation and international acceptance and advanced testing facilities supplemented by international standard quality systems (ISO) 9002:200 Certifications. Products in offering to various segments Aviation Defense Industry Railway Telecommunications Products manufactured by HBL : Batteries Electronics Coating

CERTIFICATIONS:1. Nickel Cadmium :

A) Pocket Plate, Valve Regulated Pocket Plate, Fibre Plate

ISO 9001
ISO 14001 IEC 60623 Certification (CSA) Bump Test Vibration Test Seismic Test IEC 60623 Certification ( Intertek ETL SEMKO Interim Report) OHSAS 18001 Certification (NCPP & NCFP)

B) Sintered Plate

ISO 9001

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2.

Silver Zinc :
ISO 9001

3.

Lead Acid : VRLA Single Cells, VRLA Monoblocks, LMLA, VRLA GEL

ISO 9001 ISO 14001 IEC 60896 Certification ( CSA) for VRLA Single Cells IEC 60896 Certification (CSA) for Monoblocks

4. Lithium :

ISO 9001

5. Electronics : Thyristor Control Rectifiers, DC-DC Convertors, Defence Chargers

ISO 9001

Products / Services of the Company

Nature of Products/ services and end users The Company manufactures a host of batteries in the Industrial segment. The products include Pure Lead VRLA batteries, NiCad batteries, Tubular Lead Acid batteries (Gel), Lithium batteries, and Thermal batteries amongst others. Aviation, It caters to a variety of industries and end users ranging from

Communication, Defence, Railways, and the Industrial segment. NiCad batteries to be manufactured out of the current project are an existing product of the company and are used in Railways, Defence and Industrial applications like oil refineries etc.

The Company primarily caters to the following Industries: INDUSTRY APPLICATIONS

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Aviation Railway Defence Telecom

: : : :

Air Craft Engine starting, Emergency Systems Train lighting and Air-conditioned coaches, Signaling and communications Wireless communication in Army, Battle Tanks Engine starting Back up power, basic GSM and CDMA technologies at telephone exchanges and at MSCs (Main Switching Centers) and BTH (Towers)

Oil, Gas Power

: :

Back up power in drilling and refining, backup power in gas pipe lines and standby powers for generators and at transmission and distribution

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RESEARCH METHODOLOGY Need for the study

Working capital is the life blood of the organization. The working capital is having great influence on the development and progress of any organization. The efficient management of working capital is a smooth functioning of day -t day operation of HBL POWER SYSTEMS Ltd. Hence, there is a need to study the importance of working capital management in the HBL POWER SYSTMES Ltd. There fore the present study has been undertaken in this direction.

Objectives of the study

To study short term liquidity position of the company. To study the operating cycle analysis of the company. To analysis the effectiveness of working capital management of the company.

Research Methodology
Research design Analytical tools Data Sources Period of study Analytical Ratio analysis, schedule of change in Working capital, Operating cycle analysis. Secondary data has been collected from Company records, annual reports 2002-03 to 2006-07

Source of data
1.The data required for the study is mainly based on secondary data. 2.The required information is collected from the annual report of the HBL POWER SYSTMES LIMITED comprising of balance sheets, P&L accounts. 3.The related data is obtained from the printed and published journals and financial statement of the corporation. 23

Tools for data analysis :

Financial tools such as, Financial ratio analysis, Working capital statements and . Operating cycle analysis

Period of study:
Data for a period of 5 years has been taken for the study i.e. starting from 20042008.

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WORKING CAPITAL MANAGEMENT THEORETICAL FRAME WORK

More businesses fail for lack of cash than for want of profit
Cash is the lifeline of a company, no matter how large or small the organization is. If this lifeline deteriorates so does the company's ability to fund operations, reinvest and meet capital requirements and payments. Understanding a company's cash flow health is essential to making investment decisions. A good way to judge a company's cash flow prospects is to look at its working capital Management. Working capital management involves the relationship between a firm's current assets and its current liabilities. Current Assets are resources, which are in cash or will soon be converted into cash in "the ordinary course of business". Current Liabilities are commitments which will soon require cash settlement in "the ordinary course of business".

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 to pay current liabilities as they fall due. This implies a clearly designed risk policy to determine the required liquidity level.

Why Firms Hold Cash :

The finance profession recognises the three primary reasons offered by economist John Maynard Keynes to explain why firms hold cash. The three reasons are for the purpose of speculation, for the

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 Speculation Economist Keynes described this reason for holding cash as creating the ability for a firm to take advantage of special opportunities that if acted upon quickly will favour the firm. An example of this would be purchasing extra inventory at a discount that is greater than the carrying costs of holding the inventory. Precaution Holding cash as a precaution serves as an emergency fund for a firm. If expected cash inflows are not received as expected cash held on a precautionary basis could be used to satisfy short-term obligations that the cash inflow may have been bench marked Transaction Firms are in existence to create products or provide services. The providing of services and creating of products results in the need for cash inflows and outflows.
CONCEPTS OF WORKING CAPITAL: There are two concepts of working capital: (I) Gross Working Capital. (ii) Net Working Capital.

for.

In the broad sense, the term working capital refers to the gross working capital and represents the amount of funds invested in current assets. Current assets are those assets, which in the ordinary course of business can be converted into cash within a short period of normally one accounting year. In a narrow sense, the term working capital refers to the net working capital. Net working capital is the excess of current assets over current liabilities.

Working Capital = Current Assets - Current Liabilities

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Net working capital may be positive or negative. When the current assets exceed the current liabilities the working capital is positive and the negative working capital results when the current liabilities are more than the current assets. Current liabilities are those liabilities which are intend to be paid in the ordinary course of business within a short period or normally one accounting year out of the current assets or the income of the business. The gross working capital concept is financial or going concern concept whereas net working capital is an accounting concept of working capital. These two concepts of working capital are not exclusive; rather both have their own merits. Gross concept is very suitable to the company form of organisation where there is divorce between ownership, management and control. The net concept of working capital may be suitable only for proprietary form of organisations such as sole-trader or partnership firms. However, it may be made clear that as per the general practice net working capital is referred to simply as working capital.

TYPES OF WORKING CAPITAL:

Working Capital may be classified in two ways: (a) On the basis of concept.
(b) On the basis of time.

(a) On the basis of concept, working capital 1. Gross working capital. 2. Net working capital.

(b) On the basis of time, working capital can be further classified into 1. Permanent or fixed working capital. 2. Temporary or variable working capital.

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Permanent 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. There is always a minimum Level of current assets, which is continuously required by the enterprise to carry out its normal business operations. For example, every firm has to maintain a minimum level of raw materials, work-in-process, finished goods and cash balance. This minimum level of current assets is called fixed working capital.

Temporary working capital:

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

Working Capital Cycle: Cash flows in a cycle into, around and out of a business. It is the business's life blood and every manager's primary task is to help keep it flowing and to use the cash flow to generate profits. If a business is operating profitably, then it should, in theory, generate cash surpluses. If it doesn't generate surpluses, the business will eventually run out of cash and expire. The faster a business expands the more cash it will need for working capital and investment. The cheapest and best sources of cash exist as working capital right within business. Good management of working capital will generate cash will help improve profits and reduce risks. Bear in mind that the cost of providing credit to customers and holding stocks can represent a substantial proportion of a firm's total profits. There are two elements in the business cycle that absorb cash - Inventory (stocks and work-in-progress) and Receivables arising from credit terms extended to customers and as reflected in day sales outstanding (DSO - DSO provides a rough guide to the 28

number of days that a company takes to collect payment after making a sale). The main sources of cash are Payables arising from trade terms adopted in supply chain management (your creditors) and Equity and Loans.

Each component of working capital (namely inventory, receivables and payables) has two dimensions. TIME ......... and MONEY. When it comes to managing working capital - TIME IS MONEY. If you can get money to move faster around the cycle (e.g. collect monies due from debtors more quickly) or reduce the amount of money tied up (e.g. reduce inventory levels relative to sales), the business will generate more cash or it will need to borrow less money to fund working capital. As a consequence, you could reduce the cost of bank interest or you'll have additional free money available to support additional sales growth or investment. Similarly, if you can negotiate improved terms with suppliers e.g. get longer credit or an increased credit limit; you effectively create free finance to help fund future sales.

It can be tempting to pay cash, if available, for fixed assets e.g. computers, plant,

If you ...

Then ...

Collect receivables (debtors) faster Collect receivables (debtors) slower Get better credit (in terms of duration or amount) from suppliers

You release cash from the cycle Your receivables soak up cash You increase your cash resources You free up cash You consume more cash

Shift inventory (stocks) faster Move inventory (stocks) slower

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IMPORTANCE OF WORKING CAPITAL:

Working capital is the lifeblood and nerve centre of business. Just as circulation of blood is essential in the human body for maintaining life, working capital is very essential to maintain the smooth running of a business. No business can run successfully without an adequate amount of working capital. The main advantages of maintaining adequate amount of working capital are as follows: 1. Solvency of the business: Adequate working capital helps in maintaining solvency of the business by providing uninterrupted flow of production. 2. Goodwill: sufficient working capital enables a business concern to make prompt payments and hence helps in creating and maintaining goodwill. 3. Easy loans: A concern hacking adequate working capital, high solvency and good credit standing can arrange loans from banks and others on easy and favorable terms. 4. Cash Discounts: Adequate working capital also enables a concern to avail cash discounts on the purchases and hence it reduces costs. 5. Regular payment of salaries: wages and other day-to-day commitments company which has ample working capital can make regular payment of salaries, wages and other day-to-day commitments which raises the morale of its employees, increases their efficiency, reduces wastages and costs and enhances production and profits. 6. Regular supply of raw materials: Sufficient working capital ensures regular supply of raw materials and continuous production. 7. Ability to face Crisis: Adequate working capital enables a concern to face business crisis in emergencies such as depression because during such periods, generally, there is much pressure on working capital. 8. Quick and Regular return on Investments: Every Investor wants a quick and regular return on investments. Sufficient of working capital enables a concern to pay quick and regular dividends to its investors, as there may not be much pressure to plough back profits. This gains the confidence of its investors and creates a favourable market to raise additional funds in the future.

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DISADVANTAGES OF EXCESSIVE WORKING CAPITAL

Every business concern should have adequate working capital to run its business operations. It should have neither redundant or excessive working capital nor inadequate nor shortage of working capital. Both excessive as well as short working capital positions are bad for any business.
1. Excessive working capital means idle funds which earn no profits for the business and hence the business cannot earn a proper rate of return on its investments. 2. When there is redundant working capital, it may lead to unnecessary purchasing and accumulation of inventories causing more chances of theft, waste and losses. 3. Excessive working capital implies excessive debtors and defective credit Policy which may cause higher incidence of bad debts.

4. It may result into overall inefficiency in the organisation.

5. When there is an excessive working capital relation with the banks and other financial institutions may not be maintained.

6. Due to low rate of return on investments the value of shares may also fall. DISADVANTAGES OF INADEQUATE WORKING CAPITAL

1)

A concern, which has inadequate working capital, cannot pay its shortterm liabilities in time. Thus it will loose its reputation and shall not be able to get good credit facilities.

2) The firm cannot pay day-to-day expenses of its operations and it creates inefficiencies, increases costs and reduces the profits of the business. 3) It becomes impossible to utilise efficiently the fixed assets due to nonavailability of liquid funds.

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4) The rate of return on investments also falls with the shortage of working capital.

APPROACHES TO WORKING CAPITAL The objective of working capital management is to maintain the optimum balance of each of the working capital components. This includes making sure that funds are held as cash in bank deposits for as long as and in the largest amounts possible, thereby maximizing the interest earned. However, such cash may more appropriately be "invested" in other assets or in reducing other liabilities. Though Working capital management takes place on two levels, component level and analysis level, the approach to WCM depends upon: 1. Natures or Character of Business 2. Size of Business/Scale of Operations 3. Production Policy 4. Manufacturing Process 5. Working Capital Cycle 6. Rate of Stock turnover 7. Credit Policy 8. Rate of Growth of Business 9. Earning Capacity and Dividend Policy 10. Price Level Changes

MANAGEMENT OF ACCOUNTS RECEIVABLES

Accounts receivables represent an extension of credit to customers, allowing them a reasonable period of time, in which to pay for the goods / services which they have received. The receivables represent an important component of the current assets of a firm. Firms grant trade credit to customers, because they expect the investment in receivables to

32

be profitable, either by expanding sales volume or by retaining sales that otherwise would be lost to competitors. A planned credit-policy can assist in increasing corporate profitability. When considering relaxing credit terms, management must weigh up the profits of increased sales with the cost of additional investment in debtors.

OBJECTIVE The objective of receivables management is to promote sales and profits until that point is reached where the return on investment in further funding of receivables is less than the cost of funds raised to finance that additional credit.

COSTS: The major categories of costs associated with the extension of credit and accounts receivables are: 1. COLLECTION COST These costs are administration costs incurred in collecting the receivables from the customers to whom credit sales have been made. 2. CAPITAL COST The increased level of accounts receivable is an investment in assets. They have to be financed thereby involving a cost. The cost on the use of additional capital to support, credit sales, which apparently could be profitably employed else where, are therefore a part of the cost of extending credit or receivables. 3. DELINQUENCY COST This is the cost, which arises out of the failure of the customer to meet their obligations when payment on credit sales becomes due after the expiry of the period of credit. 4. DEFAULT COST

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Sometimes the firm may not be in a position to recover the dues because of the inability of the customers, such debts are treated as bad debts and are written off as they cannot be realized, and such costs are known as default costs associated with credit sales and accounts receivables. BENEFITS: The benefits are the increased sales and profits anticipated because of a more liberal policy. When the firm extends trade credit the impact of liberal policy is likely to have two forms. First, it is oriented to sales expansions. In other words, the increase in sales would be either from the existing customer or new customers. Secondly, the extension of credit may be to protect its current sales against emerging customers. As a result of increased sales the profits of the firm will be increased.

MANAGEMENT OF INVENTORY
Inventory is the third major component of current assets. Inventories are stock of the product a company is manufacturing for sale and components that make up the product. Every enterprise needs inventory for smooth running of its activities. It serves as a link between production and distribution process. The various forms in which inventories exist in a manufacturing company are raw materials, work-in-progress and finished goods.
RAW MATERIALS : Raw materials inventories are those units, which have been purchased for converting into finished product through the manufacturing process. WORK-IN-PROGRESS : They are semi-manufactured products. They represent products that need more work before they become finished products for sale. It includes raw materials, subcontracting costs and various manufacturing costs. FINISHED GOODS :

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They are those inventories, which are completely manufactured products, ready for sale. TYPES OF INVENTORIES : The common types of inventories for most of the business firms may be classified as Finished Goods, Work in Progress and Raw Materials. Finished Goods: These are the goods, which are either being purchased by the firm or are being produced or processed in the firm. These are just ready for sale to customers. Inventory of finished goods arises because of the time involved in production process and the need to meet customers demand promptly. If the firms do not maintain a sufficient finished goods inventory, they run the risk of losing sales, as the customers who are unwilling to wait may turn to competitors. The purpose of finished goods inventory is to uncouple the production and sales function so that it is not necessary to produce the goods before sales can occur and therefore sales can be made directly out of inventory. Work in Progress: It refers to the raw materials engaged in various phases of production schedule. The degree of completion may be varying for different units. Some units might have been just introduced; while some others may be 40% completed, others may be 90% complete. The work in progress refers to partially produced goods. The value of work in progress includes the raw material costs, the direct wages, expenses already incurred, and the overheads, if any. So, the work in progress inventory contains partially produced / completed goods. Raw materials: The raw materials include the materials, which are used in production process, and every manufacturing firm has to carry certain stock of raw materials in stores. These units of raw materials are regularly issued/ transferred to production department. Inventories of raw materials are held to ensure that the production process is not interrupted by a shortage of these materials. The amount of raw materials to be kept by a firm expends on a number of factors, including the speed with which raw materials can be ordered and procured and uncertainly in the supply of these raw materials. Its purpose is to uncouple the production 35

function from the purchasing function i.e., to make these two functions independent of each other so that delays and the firm can satisfy its need for raw materials out of the inventory lying in the stores. The classification of a particular item as a finished goods or raw material depends on the kind of business being discussed. For a coal-mining firm, coal is a finished goods but it is a raw material for a steel mill as the coal is used in the production of steel. Similarly, steel is a finished good for a steel mill but it is a raw material for an Automobile firm.

RATIO ANALYSIS Ratio analysis is a widely used tool of financial analysis. It is defined as the systematic use of ratio to interpret the financial statement so that the strengths and weaknesses of a firm as well as its historical performance and current financial condition can be determined. TYPES OF RATIOS: Ratios can be classified, for the purpose of exposition, into four broad groups: 1. 2. 3. Liquidity ratios Profitability ratios Activity ratios

LIQUIDITY RATIOS The liquidity ratios measure the ability of a firm to meet its short-term obligations and reflect the short-term financial strength/solvency of a firm. The ratios, which indicate the liquidity of a firm, are: 1. 2. 3. Current Ratio Acid Test / Quick Ratio Cash Ratio

CURRENT RATIO

36

The current ratio is the ratio of total current assets to total current liabilities. It is obtained by dividing current assets by current liabilities.
Current Assets Current Ratio = -------------------------------Current Liabilities

WHERE, Current assets = Inventory + debtors + B/R + cash & bank + marketable securities +prepaid Expenses Current liabilities = creditors + B/P + outstanding expenses + bank o/d + short term loans The higher the current ratio, the larger the amount of rupees available per rupee of current liability, the more the firms ability to meet current obligations and greater the safety of funds of short-term creditors. Thus current ratio, in a way, is a measure of margin of safety to the creditors.

Although there is no hard and fast rule, conventionally, current ratios of 2:1 i.e., for every one rupee of current liabilities, there should be two rupees of current assets, are considered satisfactory.

ACID TEST OR QUICK RATIO The acid test ratio is the ratio between quick current assets and current liabilities and is calculated by dividing the quick assets by the current liabilities. The term quick assets refer to the can be converted into cash immediately. By exclusion of inventory and pre-paid expenses from current assets we get quick current assets. QUICK ASSETS 37

ACID TEST RATIO =

_______________________ QUICK LIABILITIES

WHERE

Quick Assets = Current Assets - Inventory and Prepaid Expenses Quick Liabilities = Current Liabilities - Bank Overdraft (if there in current liabilities) Conventionally, a quick ratio of 1:1 is considered satisfactory. It is generally though that if quick assets are equal to current liabilities that the concern may be able to meet its short-term obligations. CASH RATIO: The cash ratio is the ratio of cash and bank balance to the current liabilities. This ratio is the most rigorous and conservative test of a firms liquidity position. Conventionally, a ratio of 0.5:1 i.e., for every rupee of current liability there should be 50 paisa of cash and bank balance is considered satisfactory CASH & BANK BALANCES CASH RATIO = _________________________ CURRENT LIABILITIES TURNOVER RATIOS Another way of examining the liquidity is to determine how quickly certain current assets are converted into cash. The ratios to measure these are referred to as turn over ratio. Relevant turnover Ratios are... INVENTORY TURN OVER RATIO DEBTORS TURNOVER RATIO CREDITORS TURNOVER RATIO WORKING CAPITAL TURNOVER RATIO

38

INVENTORY TURNOVER RATIO: It is computed by dividing the cost of goods sold by the average inventory. COST OF GOODS SOLD __________________________ AVGERAGE INVENTORY

INVENTORY TURN OVER RATIO =

WHERE

Cost of goods sold = opening stock + purchases - closing stock Average Inventory = (opening stock + closing stock) / 2 (Note: - if average inventory is not available we can take closing stock) This ratio indicates how fast inventory is sold. A high ratio is good from the viewpoint of liquidity and vice versa. A low ratio would signify that inventory does not sell fast and stays on the shelf or in the warehouse for a long time. DEBTORS TURNOVER RATIO: It is determined by dividing the net credit sales by average debtors out standing during the year. Thus, NET CREDIT SALES ________________________ AVERAGE DEBTORS

DEBTORS TURNOVER RATIO =

This ratio measures how rapidly debts are collected. A high ratio is indicative of shorter time lag between credit sales and cash collections. are not being collected rapidly. Note: if average debtors are not available alternatively we can take debtors at the end (debtors in balance sheet) WORKING CAPITAL TURNOVER RATIO: A low rate shows that debts

39

It is determined by dividing cost of goods sold by working capital.

Working Capital = Current Assets Current Liabilities

COST OF GOODS SOLD WORKING CAPITAL TURNOVER RATIO = -----------------------------(Net) WORKING CAPITAL

Working capital turnover ratio indicates the velocity of the utilization of

net

working capital. This ratio indicates the number of times the working capital is turned over in the course of the year this ratio measures the efficiency with which the working capital is being used by a firm. A higher ratio indicates efficient utilization of working- capital and a low ratio indicates other wise.

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DATA ANALYSIS AND INTERPRETATION

STATEMENTS SHOWING OF CHANGES IN WORKING CAPITAL DURING 2003-04 AND 2004-05 (Rs.in Lakhs)
Effects on Working Capital Particulars 2002 03 2003 04 Increase Decrease

Current Assets:
Inventories Sundry debts Cash &Bank Bal Loans and Advances Total Current Liabilities :Current Liabilities Provisions Total (b) 3373.80 153.12 3526.92 7693.68 732.39 8426.07 2716.03 493.59 3209.62 8426.07 8426.07 657.77 1751.03 340.47 732.39 1751.03 (a) 3065.55 6238.55 1031.21 885.28 11220.61 3443.01 5564.40 1747.01 881.26 11635.70 377.46 715.8 674.15 4.02

Net Working Capital(a-b) Net increase in Working Capital Total

Interpretation: In HBL POWER SYSTEMS Ltd., in the year 2003 04 to 2004 05 the working capital was increased 732.39 lakhs. Due to increases in inventories, cash and bank balances and reduces in current liabilities. It can conclude that the working capital was satisfactory.

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STATEMENT OF CHANGES IN WORKING CAPITAL DURING 2004-05 AND 2005-06 (Rs.in Lakhs)
Effects on Working Capital Particulars Current Assets: Inventories Sundry debts Cash &Bank Bal Loans and Advances Total Current Liabilities :Current Liabilities Provisions Total (b) 2716.03 493.59 3209.62 8426.07 8426.07 3862.57 389.37 4251.95 7800.97 625.11 8426.07 104.22 625.11 1810.9 1146.54 1810.9 (a) 3443.01 5564.40 1747.01 881.26 11635.70 3316.97 6581.79 1208.69 945.46 12052.93 1017.39 64.2 126.04 538.32 2004 05 2005 06 Increase Decrease

Net Working Capital(a-b) Net Decrease in Working Capital Total

Interpretation: During the year 2004 05 to 2005-06the working capital was decreased 625.11 lakhs when compared previous year. Due to increases Current liabilities and slash down in maintenance of inventory and cash balance which was lead to decrease it current assets to current liabilities.

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STATEMENT OF CHANGES IN WORKING CAPITAL DURING 2005-06 AND 2006-07 (Rs.in Lakhs)
Effects on Working Capital Particulars Current Assets: Inventories Sundry debts Cash &Bank Bal Loans and Advances Current Liabilities :Total (a) 12052.93 3862.57 389.37 4251.95 7800.97 5255.57 13056.54 19210.10 5671.67 481.88 6153.55 13056.54 13056.54 7157.18 5255.57 7157.18 1809.1 92.51 3316.97 6581.79 1208.69 945.46 5318.72 11562.29 1238.70 1090.37 2001.75 4980.5 30.01 144.91 2005 06 2006 07 Increase Decrease

Current Liabilities Provisions Total (b)

Net Working Capital(a-b) Net increase in Working Capital Total

Interpretation: In the year 2005 06 to 2006 07 the working capital was increase in high rate from 7800.97 to 13056.54 lakhs when compared to previous year it was mainly due to rapid growth in inventories and debtors. From this we can conclude that the company is increasing its working capital.

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STATEMENT OF CHANGES IN WORKING CAPITAL DURING 2006-07 AND 2007-08 (Rs.in Lakhs)
Effects on Working Capital Particulars Current Assets: Inventories Sundry debts Cash &Bank Bal Loans and Advances Total Current Liabilities :Current Liabilities Provisions Total (b) 5671.67 481.88 6153.55 13056.54 4696.31 17752.85 6491.81 732.30 7224.12 17752.85 17752.85 5766.89 820.14 250.42 4696.31 5766.89 (a) 5318.72 11562.29 1238.70 1090.37 19210.10 6767.92 13834.34 2471.74 1902.97 24976.98 1449.2 2272.05 1233.04 812.6 2006 07 2007 08 Increase Decrease

Net Working Capital(a-b) Net increase in Working Capital Total

Interpretation: During the year 2006 07 to 2007 08 the working capita was increased 4696.31 lakhs is due to increased in inventories, loans & advances and Cash & bank balances. Through this we can conclude that the working capital of HBL POWER SYSTEMS Ltd., is satisfactory.

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WORKING CAPITAL OF HBL POWER SYSTEMS LTD., HYDERABAD.

(Rs. in Lakhs)
PARTICULARS CURRENT ASSETS INVENTORIES SUNDRY DEBTORS CASH/BANK BALANCES LOANS AND ADVANCES SUB TOTAL (B) Current Liabilities :CURRENT LIABILITIES PROVISIONS SUB TOTAL ( C) NET WORKING CAPITAL 7693.68 (B)-(C) 8426.07 7800.97 13056.54 17752.85 3373.80 153.12 3526.92 2716.03 493.59 3209.62 3862.57 389.37 4251.95 5671.67 481.88 6153.55 6491.81 732.30 7224.12 2003-04 3065.55 6238.55 1031.21 885.28 11220.61 2004-05 3443.01 5564.40 1747.01 881.26 11635.70 2005-06 3316.97 6581.79 1208.69 945.46 12052.93 2006-07 5318.72 11562.29 1238.70 1090.37 19210.10 2007-08 6767.92 13834.34 2471.74 1902.97 24976.98

Graph: Net Working Capital

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N et W ing ork C ital ap

1 0 80 0 1 0 60 0 1 0 40 0 1 0 20 0 1 0 00 0 8 0 00 6 0 00 4 0 00 2 0 00 0

2003-04

2004-05

2005-06

2006-07

2007-08

Y ear

INTERPRETATION The Working Capital of. past 5 years is in increasing trend. In 2003 04 to 2004 2005 there was a study increase from 7693.68lakhs to 8426.07 lakhs. But in 2005 06 there was a slight decrease i.e. from 8426.07 to 7800.97. From 2006-07 to 2007-08 it is study increase it reached 17752.85. Through this we can conclude that the working capital is increasing trend in HBL POWER SYSTEMS Ltd.

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Operating cycle analysis:

(In No. of days)
Particulars Raw material conversion period Work in process Finished goods conversion period Debtors conversion period Bills payable Operating cycle No. of O.C in a year 2003-04 85.2 40.2 2.29 22 55.8 93.89 3.834 2004-05 72.8 53.3 2.61 19.06 48.72 99.05 3.635 2005-06 79.3 41.95 0.92 18.9 62.70 78.37 4.594 2006-07 68.7 59.91 6.56 24.9 57.6 102.47 3.513 2007-08 58.3 89 11.26 25.67 52.6 131.63 2.735

INTERPRETATION :-

In HBL power systems Ltd., The Operating Cycle was low at 78.37 days in 2005 06 which was efficiency of the company to convert its inventory into cash and it was reached to 131.63 days in 2007 08.

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Ratio Analysis

CURRENT RATIO of HBL POWER SYSTEMS Ltd. :Year 2004 2005 2006 2007 2008 Current Assets Current Liabilities Current Ratio (In times) 3.16 3.58 2.82 3.13 3.47

(Rs. In Lakhs)
11267.09 11649.23 12003.39 19300.96 25038.7

(Rs. In Lakhs)
3561.08 3252.93 4255.18 6160.83 7224.31

Current Ratio (in times)

C rre t R tio (In tim s) u n a e 4 3 .5 3 2 .5 2 1 .5 1 0 .5 0 20 04 20 05 20 06 Y ear 20 07 20 08

Interpretation:

The average Current ratio of the company was 3.096 times which more than the ideal ratio is. Further the ratio is more than the standard Norm of 2:1 through out the study period. It indicates that the company is maintaining a safe margin of solvency.

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QUICK RATIO OF HBL POWER SYSTEMS Ltd. :Year 2003 - 04 2004 - 05 2005 - 06 2006 - 07 2007 08 Quick Assets (Rs. In Lakhs ) 8153.57 8133.13 8656.25 13941.57 18270.78 Current Liabilities (Rs. In Lakhs ) 3561.08 3252.93 4255.18 6160.83 7224.31 Quick Ratio (In times) 2.29 2.50 2.03 2.26 2.53

Quick Ratio (In times) Quick Ratio (In times) 3 2.5 2 1.5 1 0.5 0 2003 - 04 2004 - 05 2005 - 06 Year 2006 - 07 2007 08

Interpretation: The Average Quick ratio is 1:1 is considered satisfaction. From the above analysis we can say that the Average Quick ratio of HBL Power systems was 2.3 times which was more than the standard ratio(1:1) The ratio was in fluctuation trend, but it reached 2.53 times in 200708 from 2.29 times in 2004 05. It indicates that the company is effectively converting its assets into cash

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CASH RATIO OF HBL POWER SYSTEMS Ltd. :Cash Year

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

Current Liabilities (Rs. In Lakhs) 3561.08 3252.93 4255.18 6160.83 7224.31

Cash ratio (In times) 0.29 0.54 0.29 0.23 0.35

(Rs. In Lakhs) 1033.29 1768.04 1248.82 1416.17 2552.28

Cash ratio (In times) Cash Ratio(in Times) 0.6 0.5 0.4 0.3 0.2 0.1 0 2003 - 04 2004 - 05 2005 - 06 Year 2006 - 07 2007 08

Interpretation: Cash is the most liquid for any organisation. From he above table in HBL ower systems ltd. The average Cash ratio was 0.34 times which as below the Standard ratio. It was due to raid growh in Current liabilities when compared to the cash balance. In all the years the ratio was below the ideal ratio except in the year of study 2004 05 In this year it was 0.54 .

INVENTORY TURNOVER RATIO OF HBL POWER SYSTEMS Ltd. :-

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Inventory Inventory Year

2003 - 04 2004 - 05 2005 - 06 2006 - 07 2007 08
Inventory Turnover Ratio

Sales (Rs. In Lakhs) 15161.9 17893.3 17156.64 28948.29 36827.38

turnover Ratio (In times) 4.87 5.09 5.13 5.40 5.44

(Rs. In Lakhs) 3113.52 3516.1 3347.14 5359.39 6767.92

In e to tu o e R tio (In tim s) v n ry rn v r a e 5 .6 5 .4 5 .2 5 4 .8 4 .6 4 .4 20 03 0 4 20 04 0 5 20 05 0 6 Y ar e 20 06 0 7 20 07 0 8

Interpretation: From the above table we can say that, the average inventory turnover ratio of HBL Power systems ltd 5.186 times. Which shows that the company converted its inventory into cash with in a minimal span of time.

DAYS OF INVENTIRY HOLDING:

(in times)

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YEAR

DAYS

INVENTORY TURNOVER RATIO

DAYS OF INVENTORY HOLDING

( In times)
2003-04 2004-05 2005-06 2006-07 2007-08 360 360 360 360 360 4.87 5.09 5.13 5.40 5.44

(days)
73.93 70.74 70.23 66.65 66.16

DAYS OF INVENTORY HOLDING 76 74 72 Days 70 68 66 64 62 2003-04 2004-05 2005-06 Year 2006-07 2007-08

Interpretation: From the above table and graph shows that the days of inventory holding was in decreasing trend. It is good sign for the company this leads to decrease in inventory holding costs and un necessary investment in inventories.

DEBTORS TURNOVER RATIO OF HBL POWER SYSTEMS Ltd. Year Sales (Rs. In Lakhs) Debtors (Rs. In Lakhs 52 Debtors turnover Ratio

2004 2005 2006 2007 2008

15161.9 17893.3 16902.0 28379.8 36798.3

6256.88 5579.96 6527.09 11435.94 13830.79

2.42 3.21 2.63 2.53 2.66

Debtors turnover Ratio 3.5 3 In times 2.5 2 1.5 1 0.5 0 2004 2005 2006 Year 2007 2008

Interpretation:

The average debtors turnover ratio of the company is 2.69 times. The ratio is in fluctuating trend It indicates that the company is giving longer credit period to the debtors.

AVERAGE COLLECTION PERIOD OF HBL POWER SYSTEMS Ltd.

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Year 2004 2005 2006 2007 2008

Days 360 360 360 360 360

Debtors turnover Ratio 2.42 3.21 2.63 2.53 2.66

Average collection period 148.76 112.15 136.88 142.29 135.34

Average collection period 160 140 120 100 80 60 40 20 0 2004 2005 2006 Year 2007 2008

Interpretation :The average collection period of HBL power systems is in fluctuating trend i.e. 148.76 in 2003 04 and in 2007 08 it is 135.34. Through this we can conclude that the company was efficient in collection of debtors.

Working capital turnover ratio:

Period

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

Sales 15161.9 17893.3 16902 28379.8 36798.3

Net current assets 7706.2 8396.31 7748.21 13140.15 17814.39 Average

Working capital turnover ratio 1.57 2.13 2.22 2.20 2.06 2.036

Working capital turnover ratio 2.5 2 In times 1.5 1 0.5 0 2003-04 2004-05 2005-06 Year 2006-07 2007-08

Interpretation: The working capital turnover ratio was in fluctuating trend in 2003 04 it is 1.57 times and in 2005 06 it reaches 2.22(High) and in 2007 08 it is 2.06 It indicates that the working capital Turnover ratio is low.

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Findings
HBL POWER SYSTEM LTD., is having a good Working Capital. By comparing the Working capital of past 5 years we can say that there was a steady increase from 2003-04 to 2004-05. Although there was a decrease in 2004-05 TO 2005 - 06, the Working Capital has considerably increased from the financial year 2005-06 to 2007-08. The average Current ratio of the company was 3.096 times which is more than the ideal ratio. Further the ratio is more than the standard Norm of 2:1 through out the study period. It indicates that the company is maintaining a safe margin of solvency. The Average Quick ratio is 1:1 is considered satisfaction. From the above analysis we can say that the Average Quick ratio of HBL Power systems was 2.3 times which was more than the standard ratio(1:1). The ratio was in fluctuation trend, but it reached 2.53 times in 2007-08 from 2.29 times in 2004 05. It indicates that the company is effectively converting its assets into cash Cash is the most liquid for any organisation. From he above table in HBL ower systems ltd. The average Cash ratio was 0.34 times which as below the Standard ratio. It was due to raid growh in Current liabilities when compared to the cash balance. In all the years the ratio was below the ideal ratio except in the year of study 2004 05 In this year it was 0.54 . From the above table we can say that, the average inventory turnover ratio of HBL Power systems ltd 5.186 times. Which shows that the company converted its inventory into cash with in a minimal span of time. From the above table and graph shows that the days of inventory holding was in decreasing trend. It is good sign for the company this leads to decrease in inventory holding costs and unnecessary investment in inventories. The average debtors turnover ratio of the company is 2.69 times. The ratio is in fluctuating trend It indicates that the company is giving longer credit period to the debtors.

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The average collection period of HBL power systems is in fluctuating trend i.e. 148.76 in 2003 04 and in 2007 08 it is 135.34. Through this we can conclude that the company was efficient in collection of debtors.

The working capital turnover ratio was in fluctuating trend in 2003 04 it is 1.57 times and in 2005 06 it reaches 2.22(High) and in 2007 08 it is 2.06 It indicates that the working capital Turnover ratio is low.

SUGGESTIONS

It is suggested that the company has to reduce its excessive current assets so

that it can increase profitability. Company has to reduce debtors collection period so that effective receivable

management will possible. The company should control operating general and administrative expenses,

which leads to increase in profitability of the company. Reserves should be utilized for the growth of the company. The company should invest its surplus cash in short- term deposits for better

returns. The company must adopt inventory management techniques like ABC

Analysis, JIT and EOQ analysis to reduce level of inventories of raw materials.

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BIBLIOGRAPHY
Working Capital Management S.K. Bhatta Charya & M.Raghava J.D.Agarwal G.R.KulKarni Satish B. Mathur Prasanna Chandra I.M.Pandey Kothari

Working Capital Management Working Capital Management Working Capital Management Financial Management Financial Management Research Methodology

WEB SITES www.hbl.in www.planware.com www.google.com www.sifyfinance.com www.yahoofinance.com

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Particulars
Source of funds
Share holders funds Share capital Reserves and Surplus Loan Funds Secured Loans Unsecured Loans Deferred taxes Deferred taxes Total Application of funds Fixed Assets Less : Depreciation Net Fixed Assets Capital Works in progress Investments Current Assets, Loan and Advances Inventories Receivables Cash & Bank Balances Loans & Advances Total Less : Current liabilities and Provisions Current Liabilities Provisions Total Net Current Assets (Working Capital) Miscellaneous expenditure (to the extent not written off) Deferred revenue expenditure Total

2003-04

2004-05

2005-06

2006-07

2007-08

2007.23 6996.79

2007.23 7732.33

2007.23 8173.75

2007.23 9675.24

2007.23 16822.61

5087.86 944.73

5704.14 1245.33

4964.49 1328.17

9283.22 1938.15

11855.69 2153.81

244.50 15281.12

314.00 17003.04

478.45 16952.10

671.08 23574.94

766.22 33805.58

8021.76 1675.53 6346.23 690.78 338.38

9517.97 2095.11 7422.86 807.28 186.84

10980.26 2575.45 8404.79 502.47 135.95

12693.1 7 3138.52 9554.64 763.53 144.35

16157.47 3803.59 12353.87 1812.94 1842.52

3065.55 6238.55 1031.21 885.28 11220.61

3443.01 5564.40 1774.01 881.26 11635.70

3316.97 6581.79 1208.69 945.46 12052.93

5318.72 11562.29 1238.70 1090.37 19210.10

6767.92 13834.34 2471.74 1902.97 24976.98

3373.80 153.12 3526.92 7693.68

2716.03 493.59 3209.62 8426.07

3862.57 389.37 4251.95 7800.97

5671.67 481.88 6153.55 13056.5 4

6491.81 732.30 7224.12 17752.85 43.38

212.04 15281.12

159.97 17003.04

107.91 16952.10

55.85 23574.94 33805.58

Balance sheet of HBL Power systems ltd., (Rs.in Lakhs)

59

PROFIT & LOSS ACCOUNT OF HBL POWER SYSTEM Ltd. (Rs.in

Lakhs)

60