1 . I N T R O D U C T I O N WORKING CAPITAL:Working capital may be regarded as the life blood of business.

Working capital is of major importance to internal and external analysis because of its close relationship with the current day-to-day operations of a business. Every business needs funds for two purposes.

Long term fundsLong term funds are required to create production facilities through purchase of fixed assets such as plants, machineries, lands, buildings & etc Short term fundsShort term funds are required for the purchase of raw materials, payment of wages, and other day-to-day expenses. . It is otherwise known as revolving or circulating capital.It is nothing but the difference between current assets and current liabilities.i.e. Working Capital = Current Asset Current Liability Businesses use capital for construction, renovation, furniture, software, equipment, or machinery. It is also commonly used to purchase inventory, or to make payroll. Capital is also used often by businesses to put a down payment down on apiece of commercial real estate. Working capital is essential for any business to succeed. It is becoming increasingly important to have access to more workingcapital when we need it.

1 . 1

S T A T E M E N T O F T H E P R O B L E M To study the working capital management to analyze and evaluate the financial and working capital position of Ashok Leyland Limited with special reference to the working capital ratios. 1 . 2 O B J E C T I V E O F T H E S T U D Y To examine the combined effect of the ratios relating to working capitalmanagement point with the assistance of correlation co-efficient. Management practices of the company To analyses the impact of profitability on working capital. To determine the working capital leverage for examining the sensitivityof ROI to changes in the level of gross working capital of the company. 1 . 3 H Y P O T H E S I S O F T H E S T U D Y

Having identified the object of the study the following hypothesis havebeen formulated and tested during the period of study: There is no significant difference between the five years average Current Ratio of this company to the standard. Correlation between ROI and Liquidity Ratio of does not differ significantly.

Correlation between ROI and Working Capital Turnover Ratio of does not differ significantly. Correlation between ROI and Cash Position Ratio of does not differ significantly. Correlation between ROI and Inventory Turnover Ratio of does not differsignificantly. Correlation between ROI and Debtors Turnover Ratio of does not differ significantly. Correlation between ROI and Cash Turnover Ratio of does not differ significantly Correlation between ROI and Working Capital to Total Assets Ratio of does not differ significantly. Correlation between ROI and Current Assets Turnover Ratio of does not differ significantly.

S C O P E O F T H E S T U D Y The study is conducted at Ashok Leyland Limited. The topic selected isA study on the Working Capital Management of Ashok Leyland Limited from the financial year 2002-2003 to 20062007. So the project work is confined to financedepartment only. Tools of financial analyze like working capital ratio have been used. Based on analyze some findings and recommendation are given. 1 . 5 L I M I T A T I O N S O F T H E S T U D Y

The study is restricted for the five years from 2002-2003 to 2006-2007. The analyses are based on secondary data taken from annual reports of the company. Time has been a limited factor and it has been difficult to analysis thevarious aspect of finance within the prescribed time. The figures from the working capital statement for analysis were historical in natures. Working capital ratios will not completely show the companys good or bad financial position.

RESEARCH AND DEVELOPMENT: World-Class TechnologyTo offer world-class technology that is relevant and affordable to the Indian customer is the philosophy that drives R&D at Ashok Leyland. Over the years, this philosophy has been translated time and again into products that seamlessly integrate international technology with local needs. The role of R&D is central in fulfilling the company-wide commitment to total customer satisfactionstates Mr.R.Seshasayee, Managing Director, and adds that the increased infrastructural and financial support expresses the companys determination to become self-reliant in R&D.

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Many researchers have studied working capital from different views and in different environments. The following ones were very interesting and useful for our research:(Carole Howorthand Paul West head) Working capital management routines of a large random sample of small companies in the UK are examined. Considerable variability in the take-up of 11 working capital management routines was detected. Principal components analysis and cluster analysis confirm the identification of four distinct types of companies with regard to patterns of working capital management. The first three types of companies focused upon cash management, stockor debtors routines respectively, whilst the fourth type were less likely to take-up any working capital management routines. Influences on the amount and focuses of working capital management are discussed. Multinomial logistic regression analysis suggests that the selected independent variables successfully discriminated between the four types of companies. The results suggest that small companies focus only on areas of working capital management where they expect to improve marginal returns. (Eljelly, 2004)1 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 andregression analysis. The study found that the cash conversion cycle was of moreimportance as a measure of liquidity than the current ratio that affects profitability. The size variable was found to have significant effect on profitabilityat 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 studyalso Raheman & Nasr 282 revealed that there was great variation among industrieswith respect to the significant measure of liquidity. (Deloof, 2003)2 discussed that most firms had a large amount of cash invested inworking 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 thenumber of days accounts receivable and inventories to a reasonable minimum. The negative relationship between accounts payable and profitability is consistentwith the view that less profitable firms wait longer to pay their bills. (Ghosh and Maji, 2003)3 In this paper made an attempt to examine the efficiencyof working capital management of the Indian cement companies during 1992 1993to 2001 2002. For measuring the efficiency of working capital management, performance, utilization, and overall

efficiency indices were calculated instead ofusing some common working capital management ratios. Setting industry norms as target-efficiency levels of the individual firms, this paper also tested the speed of achieving that target level of efficiency by an individual firm during theperiod of study. Findings of the study indicated that the Indian Cement Industryas a whole did not perform remarkably well during this period. (Gitman, 1998) 4 Moses and White reveal that Lockboxes were widely used to accel erate the collection process. Virtually all large firms use lockbox systems as do a large percentage of smaller firms. This somewhat lower use by smaller firmsis a reflection of the costs versus the gains from lockbox systems. The survey farther reveals that to bring collected funds together for use, over one-half ofall large firms use concentration banking, with wire transfers and depository transfer checks being the primary means of moving funds from one bank to another.The survey was also extended to management of disbursement. The survey says theprimary tools for the management of cash outflows are zero-balance accounts andcentrally controlled disbursing. Central control of disbursements is the major tool for about 70 percent of large firms. The vast majority of larger firms use zero-balance accounts, although smaller firms use them less frequently. (Gitman, 1976) 5 & others survey was that almost all-large firms prepare cash forecast. Similar finding can also be obtained from Rappaport and others survey (1984, pp.45-64). In particular the survey indicates that a substantial number offirms keep a stock of short-term investments for precautionary reasons. Anotherconclusion of the report was that many firms also borrow to address unanticipated cash needs, either directly from banks or through the commercial paper market.The survey also indicates that in general, quantitative and statistical modelsare in wide use in working capital management. The models are in use by less than 10 percent against of large firms. Further, smaller firms do not use them all.

(Greg Filbeck and Thomas M. Krueger, 2005) 6 Firms are able to reduce financingcosts and/or increase the funds available for expansion by minimizing the amountof funds tied up in current assets. We provide insights into the performance ofsurveyed firms across key components of working capital management by using theCFO magazines annual Working Capital Management Survey. We discover that significant differences exist between industries in working capital measures across time. In addition, we discover that these measures for working capital change significantly within industries across time. ( R. Kamath, S. Khaksari, H.Meier, and J. Winklepleck, 1985 )7 Reveals that almost all large firms invest surplus cash in money market instruments. The most popular investment is commercial paper, certificates of deposit, repurchase agreements, treasury securities, and bankers acceptances. (Shin and Soenen, 1998)8 Highlighted that efficient Working Capital Management (WCM) was very important for creating value for the shareholders. The way workingcapital was managed had a significant impact on both profitability and liquidity. The relationship between the length of Net Trading Cycle, corporate profitability and risk adjusted stock return was examined using correlation and regression analysis, by industry and capital intensity. They found a strong

negative relationship between lengths of the firms net trading Cycle and its profitability.In addition, shorter net trade cycles were associated with higher risk adjustedstock returns. (Smith and Begemann 1997)9 It Emphasized that those who promoted working capitaltheory shared that profitability and liquidity comprised the salient goals of working capital management. The problem arose because the maximization of the firm s returns could seriously threaten its liquidity, and the pursuit of liquidityhad a tendency to dilute returns. This article evaluated the association between traditional and alternative working capital measures and return on investment(ROI), specifically in industrial firms listed on the Johannesburg Stock Exchange (JSE). The problem under investigation was to establish whether the more recently developed alternative working capital concepts showed improved association with return on investment to that of traditional working capital ratios or not. Results indicated that there were no significant differences amongst the years with respect to the independent variables. The results of their stepwise regression corroborated that total current liabilities divided by funds flow accounted fo

r most of the variability in Return on Investment (ROI). The statistical test results showed that a traditional working capital leverage ratio, current liabilities divided by funds flow, displayed the greatest associations with return on investment.

REFERENCE: 1.Eljelly, A. 2004. Liquidity-Profitability T r a d e o f f : A n e m p i r i c a l I n v e s t igation in an Emerging Market, International Journal of Commerce & Management,Vol 14 No 2 pp. 48 61 2.Deloof, M. 2003. Does Working Capital Management A f f e c t s P r o f i t a b i l i t y of Belgian Firms?, Journal of Business Finance & Accounting, Vol 30 No 3 & 4 pp. 573 587 3.Ghosh, S. K. and Maji, S. G. 2003. Working Capital Man a g e m e n t E f f i c i e n c y: A study on the Indian Cement Industry, The Institute of Cost and Works Accountants of India. 4.Gitman, Managerial Financial Management, 8 t h E d i t i o n , T h o m s o n , 1 9 9 8 , p p . 350-390. 5.Lawrence Gitman, D. Keith Forrester, and John R. Forrest e r , M a x i m i z i n g Cash Disbursement Float, Financial Management (summer 1976), p 15-24.

6.Greg Filbeck and Thomas M. Krueger, An Analysis o f W o r k i n g C a p i t a l Management Results Across Industries, American Journal of Business, 2005, vol. 20, issue 2, pages 11-18 7.Kamath R., S. Khaksari, H Meier, and J. Winklepleck, M a n a g e m e n t o f E x c e ss Cash: Practices and Development, Financial Management (Autumn 1985), pp. 70-77 .8 . S h i n , H . H a n d S o e n e n , L . 1 9 9 8 . E f f i c i e n c y o f W o r k i n g C a p i t a l M a n a g e m e n t and Corporate Profitability, Financial Practice and Education, Vol 8 No 2, pp37-45 9.Smith, M. Beaumont, B e g e m a n n , E . 1 9 9 7 M e a s u r i n g A s s o c i a t i o n b e t w e e n W o r king Capital and Return on Investment, South African Journal of Business Management, Vol 28 No 1.8

T H E O R E T I C A L

P E R S P E C T I V E

Ashok Leyland Ltd., is one of the leading Automobile Manufacturers in India, manufactures world-class commercial vehicles of different models in their manufacturing plants located

at various places throughout India. Finance Department is responsible for the following Working Capital Management Activities.

4.1 WORKING CAPITAL MANAGEMENT Working capital management refers to all management decisions and actions that ordinarily influence the size and effectiveness of the working capital. It is concerned with the most effective choice of working capital sources and the determination of the appropriate levels of the current assets and their use. It focusesattention to the managing of the current assets, current liability and their relationships that exist between them. In other words, working capital managementmay be defined as the management of a firms liquid assets viz-cash, marketablesecurities, accounts receivable and inventories. In the present day context of rising capital cost and scarce funds, the importance of working capital needs special emphasis. It has been widely accepted that the profitability of a business concern likely depends upon the manner in which its working capital is managed. The inefficient management of working capital notonly reduces profitability but ultimately may also lead a concern to financialcrisis. On the other hand, proper management of working capital leads to a material savings and ensures financial returns at the optimum level even on the minimum level of capital employed. We also know that both excessive and inadequate working capital is harmful for a firm. Excessive working capital leads to un-remunerative use of scarce funds. On the other hand inadequate working capital usually interrupts the normal operations of a business and impairs profitability. There are many instances of business failure for inadequate working capital.

Definition of working capital The net working capital of a business is its current assets less its current liabilities.

Current AssetsCurrent Liabilities

S t o c k s o f r a W o r k - i n - p r F i n i s h e d T r a d e d e P r e p a y T r a d e r s A c c r u a T a x a t i o n p D i v i d e n d s S h o r t t e r

w m a t e r i a l s o g r e s s g o o d s b t o r s m e n t c r e d i t o l a p a m y y l s a

a b l e o a n s

Every business needs adequate liquid resources in order to maintain day-to-day cash flow. It needs enough cash to pay wages and salaries as they fall due and to pay creditors if it is to keep its Importance of Adequate Working Capital A business firm must maintain an adequate level of working capital in order to run its business smoothly. It is worthy to note that both excessive and inadequate working capital positions are harmful. Working capital is just like the heart of business. If it becomes weak, the business can hardly prosper and survive. No business can run successfully without an adequate amount of working capital. Danger of inadequate working capital When working capital is inadequate, a firm faces the following problems. Fixed Assets cannot efficiently and effectively be utilized on account of lack of sufficient working capital. Low liquidity position may lead to liquidation offirm. When a firm is unable to meets its debts at maturity, there is an unsoundposition. Credit worthiness of the firm may be damaged because of lack of liquidity. Thus it will lose its reputation. There by, a firm may not be able to get credit facilities. It may not be able to take advantages of cash discount.

FACTORS INFLUENCING WORKING CAPITAL REQUIREMENTS The working capital needs of a firm are influenced by numerous factors.The important ones are: Nature of business Seasonality of operations Production policy Market conditions Conditions of supply Sources of Working Capital1
L o n o f n t u S a l i t y g s r e f T e r m S o u r c e s o I s s u e h a r e s o I s s u e o f d e b e e s o R e t a i n e d p r o f i t s o o f f i x e d a s s e t s o S e c u r r o m e m p l o y e e s

2 . S h o r t T e r m InternalSourceExternal Sources Depreciation funds Provision for taxation

o u r c e s

1 2 3 4 5 6 7

Accrued expenses T r a d e C r . C r e d i t . B a n k c . C u s t o m e r s . P u b l i c D . M a n a g i n g D i r e . G o v e r n m e n t

e a r e C e p c t o A s p

d p d r o r s i

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r t i t t D i r e c t o r y a n c e