Project Report ON WORKING CAPITAL MANAGEMENT IN ORISSA POWER TRANSMISSION CORPORATION LIMITED INTERNAL GUIDE EXTERNAL GUIDE Mr. Dipti Ranjan Sadhangi Mr. Bibhuti Bhusana Nayak (Prof. of AMITY) A.G.M. (corporate finance), OPTCL SUBMITTED BY Arpan Ghosh PGPM+MBA BATCH (2011-2013) (3 rd semester) Roll no.-A30401911004 1
98
Embed
Arpan Project Report on Working Capital Management
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Project Report
ON
WORKING CAPITAL MANAGEMENT
IN
ORISSA POWER TRANSMISSION CORPORATION LIMITED
INTERNAL GUIDE EXTERNAL GUIDE
Mr. Dipti Ranjan Sadhangi Mr. Bibhuti Bhusana Nayak
(Prof. of AMITY) A.G.M. (corporate finance), OPTCL
SUBMITTED BY
Arpan Ghosh
PGPM+MBA
BATCH (2011-2013)
(3rd semester)
Roll no.-A30401911004
1
AMITY GLOBAL BUSINESS SCHOOL
ACKNOWLEDGEMENT
This project report bears the imprint of many people on it.
I am very much thankful to of Amity Global Business School, BBSR for the successful
completion of my SIP report
I would like to thank my project supervisor and guide Mr Dipti Ranjan Sadhangi, the
Faculty Member, AMITY Global Business School, Bhubaneswar, for his invaluable
guidance and assistance in preparing the project report and also contributing a lot for
accomplishment of this project.
I am highly indebted to Mr. Bibhuti Bhusana Nayak, A.G.M. (corporate Finance),
OPTCL, Bhubaneswar, my corporate guide, who guided me during the internship
period and suggested many issues which has been taken care in my project work.
I am also expressing my indebtedness to my parents and my friends who gave their full-
fledged co-operation for the successful completion of project.
Arpan Ghosh
MBA 2nd year
AMITY BUSINESS SCHOOL
2
DECLARATION
I am Arpan Ghosh, a bonafide student of AMITY Business School, BBSR, pursuing
Master of Business Administration, do hereby declare that the study entitled “A study
on working capital management in OPTCL”, is my authentic work, I have completed
my study under the guidance of Mr Dipti Ranjan Sadhangi, the Faculty Member,
Amity Global Business school, Bhubaneswar and my company guide Mr. Bibhuti
Bhusan Nayak, A.G.M. (corporate Finance), OPTCL, BBSR. All the data furnished
in this project report are authentic and genuine and this report neither full nor in part has
ever been submitted for award of any other degree to either this university or any other
university.
Arpan Ghosh
MBA 2nd year
AMITY BUSINESS SCHOOL
3
CHAPTERS CONTENTS PAGE NO.
CHAPTER-1 INTRODUCTION BACKGROUND OF THE STUDY 1RELEVANCE OF THE STUDY 2PROBLEM STATEMENT 2HYPOTHESIS OF THE STUDY 3OBJECTIVES OF THE STUDY 3LIMITATIONS OF THE STUDY 4CHAPTERISATION 4
CHAPTER-2 COMPANY PROFILE 5
CHAPTER-3 REVIEW OF LITERATURE 11
CHAPTER-4 RESEARCH METHODOLOGYSELECTION OF TOPIC 18RESEARCH DESIGN 18SOURCES OF DATA COLLECTION 19FORMULAS OF RATIO ANALYSIS & DEFINITION
19
STATISTICAL AND ANALYTICAL TOOLS USED FOR DATA ANALYSIS
22
CHAPTER-5 RESULTS & FINDINGS 23-54
CHAPER-6 CONCLUSIONS & RECOMMENDATION 55-56
CHAPTER-7 IMPLICATION FOR FUTURE RESEARCH
57
DISCLAIMERBIBLIOGRAPHYANNEXURE
ABSTRACT
4
This project report entitled with “a study on working capital management in
OPTCL” is overall on working capital management of ORISSA POWER
TRANSMISSION CORPORATION LIMITED. The project on Working Capital
Management has been a very good experience. Every company faces the problem of
Working Capital Management in their day to day processes. An organization’s cost can
be reduced and the profit can be increased only if it is able to manage its Working
Capital efficiently. At the same time the company can provide customer satisfaction and
hence can improve their overall productivity and profitability. Working capital is the
fund invested by a firm in current assets. Now in a cut throat competitive era where
each firm competes with each other to increase their production and sales, holding of
sufficient current assets have become mandatory as current assets include inventories
and raw materials which are required for smooth production runs. Holding of sufficient
current assets will ensure smooth and uninterrupted production but at the same time, it
will consume a lot of working capital. Here creeps the importance and need of efficient
working capital management. This project is a sincere effort to study and analyze the
Working Capital Management of OPTCL. The project was focused on making a
financial overview of the company by conducting a Working Capital analysis of
OPTCL, the years 2007 to 2010 and Ratios & various components of working capital &
for the year 2007 to 2010. The project was of 45days duration. During the project data
are collected from company records & annual reports. The data collected were then
compiled, tabulated and analyzed. Investments in current assets represent a substantial
portion of total investment. Investment in current assets & the level of current liabilities
have to be geared quickly to change sales. By studying about the company s different
areas it to know certain things like Acid test ratio is less than one. Standard current ratio
is 2:1 and for OPTCL it is ratios not satisfactory. Debtors of the company were high;
they were increasing year by year, so more funds were blocked in debtors. Quick ratio
is satisfactory for the company. Debtor’s turnover ratio improved from 2007 to 2009 so
number of collection period decreases. But in 2010 debtor’s turnover ratio decreases
and collection period increases. The study will give immense understanding about the
components of working capital, liquidity trend, working capital trend, utilisation of
current asset and short-comings if any and to measure the effective of working capital.
CHAPTER-1
5
INTRODUCTION
BACKGROUND OF STUDY:
Whatever may be the organization, working capital plays an important role, as the
company needs capital for its day to day expenditure. Thousands of companies fail each
year due to poor working capital management practices. Entrepreneurs often don't
account for short term disruptions to cash flow and are forced to close their operations.
In simple term, working capital is an excess of current assets over the current liabilities.
Good working capital management reveals higher returns of current assets than the
current liabilities to maintain a steady liquidity position of a company. Otherwise,
working capital is a requirement of funds to meet the day to day working expenses. So a
proper way of management of working capital is highly essential to ensure a dynamic
stability of the financial position of an organization.
OPTCL is one of the largest power transmission organizations in the country, which
plays the role of transmission of electricity in the entire state of Orissa. Seeing the good
opportunity to study financial systems and practices of OPTCL, it is relatively important
take up internship assignment on ‘WORKING CAPITAL MANAGEMENT IN
OPTCL’. During the project work, it is being analyzed the working capital position of
this organization. Decisions relating to working capital and short term financing are
referred to as working capital management. These involve managing the relationship
between a firm's short-term assets and its short-term liabilities. The goal of Working
capital management is to ensure that the firm is able to continue its operations and that it
has sufficient money flow to satisfy both maturing short-term debt and upcoming
operational expenses.
Working capital management deals with maintaining the levels of working capital to
optimum, because if a concern has inadequate opportunities and if the working capital is
more than required then the concern will lose money in the form of interest on the
blocked funds. Therefore working capital management plays a very important role in
the profitability of a company. And also due to heavy competitions among different
organization’s it is now compulsory to look after working capital
RELEVANCE OF STUDY
6
At OPTCL a substantial part of the total assets are covered by current assets. Current
assets form around 30%- 40% of the total assets. However this could be less profitable
on the assumption that current assets generate lesser returns as compared to fixed assets.
But in today’s competition it becomes mandatory to keep large current assets in form of
inventories so as to ensure smooth production an excellent management of these
inventories has to be maintained to strike a balance between all the inventories required
for the production.
So, in order to manage all these inventories and determine the investments in each
inventories, the system call for an excellent management of current assets which is
really a tough job as the amount of inventories required are large in number.
Here comes the need of working capital management or managing the investments in
current assets. Thus in big companies like OPTCL it is not easy at all to implement a
good working capital management as it demands individual attention on its different
components.
The study of working capital management is very helpful for the organisation to know
its liquidity position. The study is relevant to the organization to know the day to day
expenditure. This study is relevant to give an idea to utilise the current assets.
This study is also relevant to the student as they can use it as a reference. This report
will help in conducting further research. Other researcher can use this project as
secondary data
PROBLEM STATEMENT:
Working capital management or simply the management of capital invested in current
assets is the focus of study. So topic is to study working capital management of OPTCL.
Working capital is the fund invested by a firm in current assets. Now in a cut throat
competitive era where each firm competes with each other to increase their production
and sales, holding of sufficient current assets have become mandatory as current assets
include inventories and raw materials which are required for smooth production runs.
Holding of sufficient current assets will ensure smooth and un interrupted production
but at the same time, it will consume a lot of working capital. Here creeps the
importance and need of efficient working capital management. Working capital
7
management aims at managing capital assets at optimum level, the level at which it will
aid smooth running of production and also it will involve investment of nominal
working capital in capital assets.
“The problem generally explains that, less attention has been paid to the area of short-
term finance, in particular that of working capital management. Such neglect might be
acceptable were working capital considerations of relatively little importance to the
firm, but effective working capital management has a crucial role to play in enhancing
the profitability and growth of the firm. Indeed, experience shows that inadequate
planning and control of working capital is one of the more common causes of business
failure.”
HYPOTHESIS OF THE STUDY:
The following are the hypothesis of the study
1) The firm is facing difficulty in paying short-term debt.
2) The firm is not properly managing the sundry debtor.
3) The current liabilities are increasing than current assets year by year.
OBJECTIVE OF THE STUDY: Everything in life holds some kinds of objectives to
be fulfilled. This study is not an exception to it. The following are a few straight
forward goals which i have tried to fulfil in my project:
1) To study the various components of working capital.
2) To analyze the liquidity trend.
3) To analyze the working capital trend.
4) To appraise the utilization of current asset and current liabilities and find out short-
comings if any.
5) To suggest measure for effective management of working capital.
LIMITATIONS OF THE STUDY:-
8
Following are the limitations of the study:
1) The topic working capital management is itself a very vast topic yet very important
also. Due to time restraints it was not possible to study in depth in get knowledge what
practices are followed at OPTCL.
2) Many facts and data are such that they are not to be disclosed because of the
confidential nature of the same.
3) Since the financial matters are sensitive in nature the same could not acquired easily.
4) The study is restricted to only the Four Year data of OPTCL.
CHAPTERISATION:
Following are the chapterisation of the study:
Chapter-1 Represents the background of the study, relevance of the study, problem
statements, hypothesis, objectives as well as limitations of the study.
Chapter-2 Represents company profile of OPTCL.
Chapter-3 Represents review of literature.
Chapter-4 Represents research methodology of the study including sources of data
collection, formulas and statistical tools used for data analysis.
Chapter -5 Represents results and findings.
Chapter -6 Represents conclusion and suggestion.
Chapter -7 Represents implication for future research.
ORISSA POWER TRANSMISSION CORPORATION LIMITED (OPTCL), one of the
largest Transmission Utility in the country was incorporated in March 2004 under the
Companies Act, 1956 as a company wholly owned by the Government of Orissa to
undertake the business of transmission and wheeling of electricity in the State.
Started commercial operation from 01.04.2005 only as a Transmission Licensee. (a
deemed Transmission Licensee under Section 14 of Electricity Act, 2003)
Notified as the State Transmission Utility (STU) by the State Govt. and discharges the State Load Dispatch functions.
Number of employees as on (01.10.2008): 3799Executives-722, Non-Executives - 3077
Number of posts vacant as on 1/2007 – 1186Executives-744, Non-Executives- 442
Number of pensioners as on 31.01.2007 – 6200 Number of Grid S/S including switching stations – 81 Length of EHT lines – 9550 Ckt-Kms. Number of Bays – 1506
The registered office of the Company is situated at Bhubaneswar, the capital of the State
of Orissa. Its projects and field units are spread all over the State. OPTCL became fully
operational with effect from 9th June 2005 consequent upon issue of Orissa Electricity
Reform (Transfer of Transmission and Related Activities) Scheme, 2005 under the
provisions of Electricity Act, 2003 and the Orissa Reforms Act, 1995 by the State
Government for transfer and vesting of transmission related activities of GRIDCO with
OPTCL. The Company has been designated as the State Transmission Utility in terms
of Section 39 of the Electricity Act, 2003. Presently the Company is carrying on intra
state transmission and wheeling of electricity under a license issued by the Orissa
Electricity Regulatory Commission. The Company is also discharging the functions of
State Load Despatch Centre. The Company owns Extra High Voltage Transmission
system and operates about 9550.93 ckt kms of transmission lines at 400 kV, 220 kV,
132 kV levels and 81 nos. of substations with transformation capacity of MVA. The
day-to-day affairs of the Company are managed by the Managing Director assisted by
10
whole-time Functional Directors as per the advice of the Board of Directors constituted.
They are in turn assisted by a team of dedicated and experienced professionals in the
various fields.
VISION AND MISSION OF OPTCL:
VISION:
1)To build up OPTCL as one of the best transmission utility in the country in terms of
uninterrupted power supply, minimizing the loss, contributing states’ industrial growth.
2)Development of a well coordinated transmission system in the backdrop of formation
of strong National Power Grid as a flagship, endeavour to steer the development of
Power System on Planned path leading to cost effective fulfilment of the objective of
'Electricity to All’ at affordable price.
MISSION:
Plan & operate the Transmission system so as to ensure that transmission system built,
operated and maintained to provide efficient, economical and coordinated system of
Transmission and meet the overall performance Standards.
(i) To upgrade the transmission system network so as to handle power to the tune of
3000 MW for 100% availability of power to each family.
(ii) To impart advanced techno managerial training to the practicing engineers and work
force so as to professionalism them with progressive technology and capable
commercial organization of the country so as to build up the most techno-commercially
viable model of the country
OBJECTIVES OF OPTCL:
11
To effectively operate Transmission lines and Sub-Stations in the State for evacuation
of power from the state generating stations feed power to state distribution companies,
wheeling of Power to other states, maintenance of the existing lines and sub-stations for
power transmission and to undertake power system improvement by renovation, up-
gradation and modernization of the transmission network.
OPTCL being a State Transmission Utility Public Authority has set the following
objectives.
Undertake transmission and wheeling of electricity through intra- State Transmission
system
1) Discharge all functions of planning and coordination relating to Intra State, inter
State transmission system with Central Transmission Utility, State Govt. Generating
Companies, Regional Power Board, Authority, Licensees or other person notified by
State Govt. in this behalf.
2) Ensure development of an efficient and economical system of intra state and inter
State transmission lines for smooth flow of electricity from generating station s to the
load centres.
3) Provide non-discriminatory open access to its transmission system for use by any
licensee or generating company or any consumer as and when such open access is
provided by the State Commission on payment of transmission charges/surcharge as
may be specified by the State Commission.
4) Exercise supervision and control over the intra-state transmission system, efficient
operation and maintenance of transmission lines and substations and operate State Load
Despatch Centres to ensure optimum scheduling and despatch of electricity and to
ensure integrated operation of power systems in the State.
5)Restore power at the earliest possible time through deployment of emergency
Restoration system in the event of any Natural Disasters like super cyclone, flood etc.
POWER SECTOR REFORM IN THE STATE:
12
The Power Sector Reforms in the State of Orissa was started during November 1993 in
an organized manner. The main objective of the reform was to unbundle generation,
transmission and distribution and to establish an independent and transparent
Regulatory Commission in order to promote efficient and accountability in the Power
Sector.
In order to implement the reform, in the first phase, two corporate entities namely Grid
Corporation of Orissa Limited (GRIDCO) and Orissa Hydro Power Corporation
Limited (OHPC) were established in April 1995. GRIDCO was incorporated under the
Companies Act, 1956 in April 1995 to own and operate the transmission and
distribution systems in the State. Similarly OHPC was incorporated to own and operate
all the hydro generating stations in the State.
The State Government enacted the Orissa Electricity Reform Act, 1995 which came
into force with effect from 1.4.1996. In exercise of power under Section 23 and 24 of
the Orissa Electricity Reform Act, 1995,the State Govt. notified the Orissa Electricity
Reform (Transfer of Undertakings, Assets, Liabilities, proceedings and Personnel )
Scheme Rules 1996. As per the scheme, the transmission ,distribution activities of the
erstwhile OSEB along with the related assets, liabilities, personnel and proceedings
were vested on GRIDCO . Simultaneously the hydro generation activities of OSEB
along with related assets, liabilities, personnel and proceedings were vested on OHPC.
In order to privatize the distribution functions of electricity in the State, four
Distribution Companies namely Central Electricity Supply Company of Orissa Limited
(CESCO), North Eastern Electricity Supply Company of Orissa Limited (NESCO),
southern Electricity Supply Company of Orissa limited (SOUTHCO) & Western
Electricity Supply Company Orissa Limited (WESCO) were incorporated under the
Companies Act, 1956 as separate corporate entities. During November 1998 the State
Govt. issued the “Orissa Electricity Reform (Transfer of Assets, Liabilities, Proceedings
and Personnel of GRIDCO to distribution Companies) Rules 1998” wherein the
electricity distribution and retail supply activities along with the related assets,
liabilities, personnel and proceedings were transferred from GRIDCO to the four
Distribution Companies. Through a process of international Competitive Bidding (ICB),
13
the four Distribution Companies were privatized during 1999.
After separation of Distribution business, GRIDCO left with electricity Transmission
and Bulk Supply/Trading activities. GRIDCO was also declared as the State
Transmission Utility and was discharging the functions of State Load Despatch Centre
(SLDC).
The Government of India enacted the Electricity Act, 2003 which came into effect from
10th June 2003. Under the provisions of the said Act, trading in electricity has been
recognised as a distinct licensed activity, which can only be undertaken by a licensee to
be granted by the appropriate commission. The Act specifically prohibits the STU and
Transmission Company in the State from engaging in the business of trading. GRIDCO
being a State Transmission Utility was not permitted to engage itself in the trading in
electricity and was required to segregate its activities in a manner within the transional
period allowed under the Act that, the entity which will undertake transmission STU
and SLDC function will not undertake the activities of Trading and Bulk Supply of
Electricity.
Keeping in view the statutory requirement of the Electricity Act for separation of
trading and transmission functions into two separate entities, the State Govt
incorporated Orissa Power Transmission Corporation Limited (OPTCL) to take over the
transmission, STU/SLDC functions of GRIDCO.
In exercise of the power conferred under Section 39,131, 133 & 134 of the Electricity
Act, 2003, read with Section 23 & 24 of the Orissa Electricity Reform Act , 1995, the
State Govt. issued the notification “Orissa Electricity Reform (Transfer of Transmission
and Related Activities) Scheme 2005” on 9.6.2005. The Scheme was made effective
from 1.4.2005.
By virtue of the Transfer Scheme, 2005, OPTCL now undertaking the functions of
transmission of electricity in the State of Orissa and has been declared as the State
Transmission Utility. GRIDCO is also discharging the functions of SLDC.
REFORM ACHIEVEMENT:
14
Milestones of Orissa Power Sector Reform
1) First Transfer between OHPC and GRIDCO effected on 1st April, 1996
2)OER Act, 1995 created Orissa Electricity Regulatory Commission,
a Regulatory Body which became functional on 1.8.1996
3) Unbundling of Transmission and Distribution via Second Transfer Scheme
effective from November 26, 1998
4)9 Tariff Orders after public hearing have been passed by OERC
5) BSES took over management and operational control of 3 Distribution Companies
(WESCO, SOUTHCO and NESCO) from April 1, 1999
6) Privatization of Distribution completed with AES taking over thefourth distribution company, CESCO from September 1, 1999
7) CESCO remained under the management of an Administrator (CEO)appointed by OERC with effect from 27.8.2001
8)A new public limited company under the name “ Orissa Power TransmissionCorporation Limited “ was incorporated on 29.03.2004 to carry on thebusiness of Transmission, STU, and SLDC functions of GRIDCO
9) OPTCL became functional on 1.4.2005. GRIDCO continue to carry onits Bulk Supply and Trading functions
CHAPTER-3: REVIEW OF LITERATURE
15
The purpose of this chapter is to present a review of literature relating to the working
capital management. The following are the literature review by different authors and
different research scholars.
Pass C.L., Pike R.H1 (1984), studied that over the past 40 years major theoretical
developments have occurred in the areas of longer-term investment and financial
decision making. Many of these new concepts and the related techniques are now being
employed successfully in industrial practice. By contrast, far less attention has been paid
to the area of short-term finance, in particular that of working capital management. Such
neglect might be acceptable were working capital considerations of relatively little
importance to the firm, but effective working capital management has a crucial role to
play in enhancing the profitability and growth of the firm. Indeed, experience shows
that inadequate planning and control of working capital is one of the more common
causes of business failure.
Herzfeld B2 (1990), studied that “Cash is king”--so say the money managers who share
the responsibility of running this country's businesses. And with banks demanding more
from their prospective borrowers, greater emphasis has been placed on those
accountable for so-called working capital management. Working capital management
refers to the management of current or short-term assets and short-term liabilities. In
essence, the purpose of that function is to make certain that the company has enough
assets to operate its business. Here are things you should know about working capital
management.
Samiloglu F.and Demirgunes K3 (2008), studied that the effect of working capital
management on firm profitability. In accordance with this aim, to consider statistically
significant relationships between firm profitability and the components of cash
conversion cycle at length, a sample consisting of Istanbul Stock Exchange (ISE) listed
1
2
3
16
Appuhami, Ranjith B4 (2008), studied impact of firms' capital expenditure on their
working capital management. The author used the data collected from listed companies
in the Thailand Stock Exchange. The study used Schulman and Cox's (1985) Net
Liquidity Balance and Working Capital Requirement as a proxy for working capital
measurement and developed multiple regression models. The empirical research found
that firms' capital expenditure has a significant impact on working capital management.
The study also found that the firms' operating cash flow, which was recognized as a
control variable, has a significant relationship with working capital management.
Hardcastle J5 (2009)., studied that Working capital, sometimes called gross working
capital, simply refers to the firm's total current assets (the short-term ones), cash,
marketable securities, accounts receivable, and inventory. While long-term financial
analysis primarily concerns strategic planning, working capital management deals with
day-to-day operations. By making sure that production lines do not stop due to lack of
raw materials, that inventories do not build up because production continues unchanged
when sales dip, that customers pay on time and that enough cash is on hand to make
payments when they are due. Obviously without good working capital management, no
firm can be efficient and profitable.
Thachappilly G6 (2009)., “Working Capital Management Manages Flow of Funds”,
(2009) describes that Working capital is the cash needed to carry on operations during
the cash conversion cycle, i.e. the days from paying for raw materials to collecting cash
from customers. Raw materials and operating supplies must be bought and stored to
ensure uninterrupted production. Wages, salaries, utility charges and other incidentals
must be paid for converting the materials into finished products. Customers must be
allowed a credit period that is standard in the business. Only at the end of this cycle
does cash flow in again
4
5
6
17
Beneda, Nancy; Zhang, Yilei7 (2008), studied impact of working capital management
on the operating performance and growth of new public companies. The study also
sheds light on the relationship of working capital with debt level, firm risk, and
industry. Using a sample of initial public offerings (IPO's), the study finds a significant
positive association between higher levels of accounts receivable and operating
performance. The study further finds that maintaining control (i.e. lower amounts) over
levels of cash and securities, inventory, fixed assets, and accounts.
Dubey R8 (2008)., studied The working capital in a firm generally arises out of four
basic factors like sales volume, technological changes, seasonal , cyclical changes and
policies of the firm. The strength of the firm is dependent on the working capital as
discussed earlier but this working capital is itself dependent on the level of sales volume
of the firm. The firm requires current assets to support and maintain operational or
functional activities. By current assets we mean the assets which can be converted
readily into cash say within a year such as receivables, inventories and liquid cash. If
the level of sales is stable and towards growth the level of cash, receivables and stock
will also be on the high.
McClure B9 (2007)., “Working Capital Works” describes that Cash is the lifeline of a
company. 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 (WCM).
Cash is king, especially at a time when fund raising is harder than ever. Letting it slip
away is an oversight that investors should not forgive. Analyzing a company's working
capital can provide excellent insight into how well a company handles its cash, and
whether it is likely to have any on hand to fund growth and contribute to shareholder
value.
7
8
9
18
Gass D10 (2006)., studied "Cash is the lifeblood of business" is an often repeated maxim
amongst financial managers. Working capital management refers to the management of
current or short-term assets and short-term liabilities. Components of short-term assets
include inventories, loans and advances, debtors, investments and cash and bank
balances. Short-term liabilities include creditors, trade advances, borrowings and
provisions. The major emphasis is, however, on short-term assets, since short-term
liabilities arise in the context of short-term assets. It is important that companies
minimize risk by prudent working capital management.
Maynard E. Refuse11 (1996), Argued that attempts to improve working capital by
delaying payment to creditors is counter-productive to individuals and to the economy
as a whole. Claims that altering debtor and creditor levels for individual tiers within a
value system will rarely produce any net benefit. Proposes that stock reduction
generates system-wide financial improvements and other important benefits. Urges
those organizations seeking concentrated working capital reduction strategies to focus
on stock management strategies based on “lean supply-chain” techniques.
Thomas M. Krueger12 (2005), studied distinct levels of WCM measures for different
industries, which tend to be stable over time. Many factors help to explain this
discovery. The improving economy during the period of the study may have resulted in
improved turnover in some industries, while slowing turnover may have been a signal of
troubles ahead. Our results should be interpreted cautiously. Our study takes places over
a short time frame during a generally improving market. In addition, the survey suffers
from survivorship bias – only the top firms within each industry are ranked each year
and the composition of those firms within the industry can change annually.
Eljelly13 (2002) empirically examined the relationship between profitability and
liquidity, as measured by current ratio and cash gap (cash conversion cycle) on a sample
of 929 joint stock companies in Saudi Arabia. Using correlation and regression analysis,
10
11
12
13
19
Eljelly [9]found significant negative relationship between the firm's profitability and its
liquidity level, as measured by current ratio. This relationship is more pronounced for
firms with high current ratios and long cash conversion cycles. At the industry level,
however,he found that the cash conversion cycle or the cash gap is of more importance
as a measure of liquidity than current ratio thataffects profitability. The firm size
variable was also found to have significant effect on profitability at the industry level.
Lazaridis and Tryfonidis 14(2004), conducted a cross sectional study by using a sample
of 131 firms listed on the Athens Stock Exchange for the period of 2001 - 2004 and
found statistically significant relationship between profitability, measured through gross
operating profit, and the cash conversion cycle and its components (accounts
receivables, accounts payables, and inventory). Based on the results analysis of annual
data by using correlation and regression tests, they suggest that managers can create
profits for their companies by correctly handling the cash conversion cycle and by
keeping each component of the conversion cycle (accounts receivables, accounts
payables, and inventory) at an optimal level.
Raheman and Nasr15 (2004), studied the effect of different variables of working capital
management including average collection period, inventory turnover in days, average
payment period, cash conversion cycle, and current ratio on the net operating
profitability of Pakistani firms. They selected a sample of 94 Pakistani firms listed on
Karachi Stock Exchange for a period of six years from 1999 - 2004 and found a strong
negative relationship between variables of working capital management and
profitability of the firm. They found that as the cash conversion cycle increases, it leads
to decreasing profitability of the firm and managers can create positive value for the
shareholders by reducing the cash conversion cycle to a possible minimum level.
Garcia-Teruel and Martinez-Solano16(1996) collected a panel of 8,872 small to
medium-sized enterprises (SMEs) from Spain covering the period 1996 - 2002. They
tested the effects of working capital management on SME profitability using the panel
data methodology. The results, which are robust to the presence of endogeneity,
14
15
16
20
demonstrated that managers could create value by reducing their inventories and the
number of days for which their accounts are outstanding. Moreover, shortening the cash
conversion cycle also improves the firm's profitability.
Falope and Ajilore17 (2003), used a sample of 50 Nigerian quoted non-financial firms
for the period 1996 -2005. Their study utilized panel data econometrics in a pooled
regression, where time-series and cross-sectional observations were combined and
estimated. They found a significant negative relationship between net operating
profitability and the average collection period, inventory turnover in days, average
payment period and cash conversion cycle for a sample of fifty Nigerian firms listed on
the Nigerian Stock Exchange. Furthermore, they found no significant variations in the
effects of working capital management between large and small firms.
Kouma Guy18, (2001) in a study on, “Working capital management in healthcare”,
Working capital is the required to finance the day to day operations of an organization.
Working capital may be require to bridge the gap between buying of stocked items to
eventual payment for goods sold on account. Working capital also has to fund the gap
when products are on hand but being held in stock. Products in stock are at full cost,
effectively they are company cash resources which are out of circulation therefore
additional working capital is required to meet this gap which can only be reclaimed
when the stocks are sold (and only if these stocks are not replaced) and payment for
them is received. Working capital requirements have to do with profitability and much
more to do with cash flow.
Mehmet SEN, Eda ORUC (2005)19 in the study “Relationship between the efficiency
of working capital management and company size”, As it is known, one of the
reasons which cause change in working capital from one period to another is the change
in management efficiency. The change in management efficiency will affect the change
in working capital in a way as increaser or reducer from on period to another. In this
study, the effect of change in management efficiency in working capital management in
17
18
19
21
to the change in working capital is compared by company size and sectors. The data of
this study covers sixty periods as the total of quarterly financial statement of 55
manufacturing companies which were in operation in Istanbul Stock exchange (ISE)
between the years 1993 and 2007. In every period we studied, for inventories short term
commercial receivables and short term commercial liabilities, and calculated the effect
of change in management efficiency on to the effect of working capital change. In all
sectors considered, in the change in working capital, and observed the effect of reducing
of efficiency in inventory management. It is also observed that efficiency change in the
management of the short term commercial receivables and the short term commercial
liabilities by the company sizes and sectors make a positive effect in to the change in
working capital
Brealey, R., (1997)20 in a study on, “Working Capital management concepts work
sheet university of phoenix”. Concept application of concept in the Simulation
reference to concept in reading cash conversion cycle cash conversions is the process of
managing a company’s cash inflows and outflows. In the simulation, the finance
manager was responsible for balancing sales with collections or accounts receivables
(cash inflows) and purchases with payments or accounts payables (cash outflows). This
delicate balance maintains the company’s balance sheet keeping the cash and loans in a
situation of financial stability and keeping the money from being tied up. Principles of
corporate finance. Working capital management. New York: McGraw-Hill.
20
22
CHAPTER-4
RESEARCH METHODOLOGY
Research methodology is a systematic approach in management research to achieve
pre-defined objectives. It helps a researcher to guide during the course of research work.
Rules and techniques stated in research methodology save time and labour of the
researcher as researcher know how to proceed to conduct the study as per the objective.
SELECTION OF TOPIC: The selection of topic is a crucial factor in any research
study. There should be newness and it should give maximum scope to explore the ideas
from different angles.
In present day due to increase in competition, working capital is becoming necessary for
the organisation. It is that part of capital which is necessary to undertake day to day
expenditure of the business organization. Whatever may be the organization, working
capital plays an important role, as the company needs capital for its day to day
expenditure. Thousands of companies fail each year due to poor working capital
management practices. Entrepreneurs often don't account for short term disruptions to
cash flow and are forced to close their operations. Working capital is the fund invested
by a firm in current assets. Now in a cut throat competitive era where each firm
competes with each other to increase their production and sales, holding of sufficient
current assets have become mandatory as current assets include inventories and raw
materials which are required for smooth production runs. Holding of sufficient current
assets will ensure smooth and un interrupted production but at the same time, it will
consume a lot of working capital. Here creeps the importance and need of efficient
working capital management. After due to consultation with the external guide /internal
guide, the topic was finalized and titled as-“A STUDY ON WORKING CAPITAL
MANAGEMENT IN OPTCL, BBSR”
SELECTION OF LOCATION FOR THE STUDY: The location for study was
selected as the corporate office of OPTCL, Bhubaneswar.
RESEARCH DESIGN: “A Research design is the arrangement of conditions for
collection and analysis of data in a manner that aims to combine relevance to the
research purpose with economy in procedure” The research design followed to study the
23
working capital management in ORISSA POWER TRANSMISSION CORPORATION
LIMITED (OPTCL) is Descriptive and Analytical Research Design.
SOURCES OF DATA COLLECTION:
1. Secondary data collection
Secondary data collection:
The secondary data are those which have already collected and stored. Secondary data
easily get those secondary data from records, journals, annual reports of the company
etc. It will save the time, money and efforts to collect the data. Secondary data also
made available through trade magazines, annual reports, books etc.
This project is based secondary data collected through annual reports of the
organization. The data collection was aimed at study of working capital management of
the company.
Project is based on
1. Annual report of OPTCL. 2008-2009
2. Annual report of OPTCL. 2009-20010
3. Annual report of OPTCL. 20010-2011
FORMULAS OF RATIO ANALYSIS & DEFINITION
RATIO:
Ratio analysis is the powerful tool of financial statements analysis. A ratio is define as
“the indicated quotient of two mathematical expressions” and as “the relationship
between two or more things”. The absolute figures reported in the financial statement do
not provide meaningful understanding of the performance and financial position of the
firm. Ratio helps to summaries large quantities of financial data and to make qualitative
judgment of the firm’s financial performance.
24
ROLE OF RATIO ANALYSIS
Ratio analysis helps to appraise the firms in the term of there profitability and efficiency
of performance, either individually or in relation to other firms in same industry. Ratio
analysis is one of the best possible techniques available to management to impart the
basic functions like planning and control. As future is closely related to the immediately
past, ratio calculated on the basis historical financial data may be of good assistance to
predict the future. E.g. On the basis of inventory turnover ratio or debtor’s turnover ratio
in the past, the level of inventory and debtors can be easily ascertained for any given
amount of sales. Similarly, the ratio analysis may be able to locate the point out the
various arias which need the management attention in order to improve the situation.
E.g. Current ratio which shows a constant decline trend may be indicate the need for
further introduction of long term finance in order to increase the liquidity position. As
the ratio analysis is concerned with all the aspect of the firm’s financial analysis
liquidity, solvency, activity, profitability and overall performance, it enables the
interested persons to know the financial and operational characteristics of an
organization and take suitable decisions.
LIQUDITY RATIO:
Liquidity refers to ability of a concern to meet its current obligations as and when these
become due. The short-term obligations are met by realising amounts from current,
floating or circulating asset. The current asset either be liquid or near liquidity. These
should be convertible into cash for paying obligation of short-term nature. To measure
the liquidity of a firm, following ratios can be calculated:
A) CURRENT RATIO: Current assets include cash and those assets which can be
converted in to cash within a year, such marketable securities, debtors and inventories.
All obligations within a year are include in current liabilities. Current liabilities include
creditors, bills payable accrued expenses, short term bank loan income tax liabilities and
long term debt maturing in the current year. Current ratio indicates the availability of
current assets in rupees for every rupee of current liability.
CURRENT RATIO = CURRENT ASSET/ CURRENT
LIABILITIES
25
B) QUICK RATIO OR ACID TEST: Quick ratios establish the relationship between
quick or liquid assets and liabilities. An asset is liquid if it can be converting in to cash
immediately or reasonably soon without a loss of value. Cash is the most liquid
asset .other assets which are consider to be relatively liquid and include in quick assets
are debtors and bills receivable and marketable securities. Inventories are considered as
less liquid. Inventory normally required some time for realizing into cash. Their value
also be tendency to fluctuate. The quick ratio is found out by dividing quick assets by
current liabilities.
QUICK RATIO = Total liquid asset/Total current liabilities
C) ABSOLUTE LIQUID ASSET: Even though debtors and bills receivables are
considered as more liquid then inventories, it cannot be converted in to cash
immediately or in time. Therefore while calculation of absolute liquid ratio only the
absolute liquid assets as like cash in hand cash at bank, short term marketable securities
are taken in to consideration to measure the ability of the company in meeting short
term financial obligation. It calculates by absolute assets dividing by current liabilities.
ABSOLUTE LIQUID RATIO=absolute liquid asset/total current liabilities
EFFICIENCY RATIO: Funds are invested in various assets in business to make sales
and earn profits. The efficiency with which assets are managed directly affects the
volume of sale. Activity ratios measure the efficiency and effectiveness with which a
firm manages its resources or assets. These ratios are also called turnover ratios.
A) DEBTORS TURNOVER RATIO: Receivable turnover ratio provides relationship
between credit sales and receivables of a firm. It indicates how quickly receivables are
a) Cash and bank balances in 2008-2009 were Rs 907019750. It is decreased to Rs
727106129 in 2009-2010, with a -19.23% growth. In 2010-2011 it suddenly again
decreased to Rs 579433119.
b) Debtors increases which was not a good sign. In 2008-2009 debtors were Rs
1,055,097,473 and it increased Rs 1,055,631,698 in 2009-2010. In 2010-2011 it was
again increased to Rs 1,558,735,700. Total increase in Debtors is Rs 503,638,227.
c) Inventories were increased at a good speed. The inventories were Rs 808519278 in 2008-2009. In 2009-2010 it increased to Rs 969056460, ultimately increase in Rs 160537182, with the percentage growth 19.85%. In 2010-2011 it again increased to Rs 175213491 with the increase in 18.08%.
28
d) Sundry creditors also increased a lot. In 2008-2009 it was Rs 689526597. Then it
increased by Rs 34524859 which ultimately amounted to Rs 724051456 with a increase
of 5.00% in the year 2009-2010. In 2010-2011 it increased to Rs 131501401 with a
percentage increase of 18.16%.
e) Provisions also increased throughout this 3years. In 2008-2009 it was Rs
4817002603. Then it increased to Rs 5695667475 with a percentage increase of
18.24%. In 2010-2011 it again increased to Rs 5629960268 with a percentage increase
in 1.15%.
(Table 5.2: Variables of Working Capital Management)
VARIABLESYEARS
2008-2009 2009-2010 2010-2011
ROTA (Return on Total Assets)
0.22 0.10 0.18
OPM (operating profit margin)
27.78% 34.65% 38.58%
GEAR (Gearing Ratio i.e. financial debt / total assets)
0.43:1 0.33:1 0.38:1
CR (Current Ratio) 0.86:1 0.62:1 0.89:1
QAR (Quick Assets Ratio) 0.27:1 0.22:1 0.25:1
CA/TA (Current Assets to Total Assets)
0.21 0.16 0.18
CL/TA (Current Liabilities to Total Assets)
0.24 0.26 0.32
SK/CA (Stocks to Current Assets)
0.13 0.19 0.26
TD/CA (Trade Debtors to 0.17 0.21 0.35
29
Current Assets)
CA_TURN (Current Assets Turnover is Sales/Current Assets)
1.08 0.60 0.91
The various variables of working capital is presented in table 5.2. An analysis of data
presented in the table reveals the following findings;
A) Return on total asset came 0.22 in 2008-2009, 0.10 in 2009-2010 and 0.18 2010-
2011.
B) Operating profit margin was 27.78% in 2008-2009 then it increased to, 34.65%, and
38.58% in 2009-2010, and 2010-2011 respectively. Anything between 65% - 85% is
known as a good operating margin. And for OPTCL is a sign of alarm.
C) Gearing ratio was 0.43:1 in 2008-2009, in 2009-2010 it is 0.33:1 and in 2010-2011
0.38:1
D) Current ratio generally reduced for the organisation, in 2008-2009 it was 0.86:1 and
it reduced to 0.62:1 in 2009-2010 and then it again reduced to 0.89:1 in 2010-2011.
E) Quick asset ratio in 2008-2009 as it was 0.27:1, in 2009-2010 it became 0.22:1 and
in 2010-2011 it became 0.89:1.
F) Current asset to total asset ratio came 0.21, 0.16 and 0.18 in the year 2008-2009,
2009-2010 and 2010-2011.
G) Current liability to total asset ratio came 0.24 in 2008-2009, in 2009-2010 it came
0.26, and in 2010-2011 it came to 0.32:1.
H) Stock to current asset is 0.13, 0.19 and 0.26 in 2008-2009, 2009-2010 and 2010-
2011 respective years.
I) Trade debtors in 2008-2009 is 0.17, in 2009-2010 is 0.21 and in 2010-2011 is 0.35.
30
J) Current asset turnover is 1.08 in 2008-2009, 0.60 in 2009-2010 and it become 0.91 in
2010-2011.
Table 5.3: Components of Current ratio, Quick ratio and Absolute Liquid Ratios
2008-2009 2009-2010 2010-2011
Current ratio0.86:1 0.62:1
0.89:1
Quick ratio 0.27:1 0.22 0.25:1
Absolute Liquid Ratio 0.12:1 0.08:1 0.07:1
SK/CA 0.13 0.19 0.26
TD/CA 0.17 0.21 0.35
CA/TA 0.21 0.16 0.18
CL/TA 0.24 0.26 0.32
Inventory Days 43 days 115days 122days
Debtor Turnover Days
57days 126days 119days
Creditors turnover days
37 days 86days 98days
Table-5.3 revels the components of current ratio, quick ratio and absolute quick ratio. From the table following things can be derived:
a) In 2008-2009, it is found that the current ratio of OPTCL is 0.86:1. . It is below the
standard of 2:1 and it is due to a decrease in total current assets from previous year and
an increase in current liability this year. It is a not good indication according to the rule
of thumb. Because the firm has more current liabilities than current assets. The firm
31
may not be able to meet its short term obligations in time. In 2009-2010, it is found that
the current ratio of OPTCL was 0.62:1 it was not a good indication according to rule of
thumb. In 2010-2011, it is found that the current ratio of OPTCL was 0.89:1 it was not a
good indication according to rule of thumb.
b) Quick ratio in 2008-2009 it was 0.27:1 in 2009-2010 it was 0.22:1 and in 2010-2011 it was
0.25:1.
c) The Absolute Liquid Ratio of the firm for the financial year 2008-2009 is found to be
0.12:1 which is below the normal standard of 1:2 or 0.5:1. This is due to less cash and
bank balances of the organization in comparison to the Current Liabilities. In the year
2009-2010, the absolute liquid ratio found to be 0.08:1. In the year 2010-2011, the
absolute liquid ratio found to be 0.07:1.
d) Stock to current asset is 0.13, 0.19 and 0.26 in 2008-2009, 2009-2010 and 2010-2011
respective years.
e) Trade debtors in 2008-2009 is 0.17, in 2009-2010 is 0.21 and in 2010-2011 is 0.35.
f) Current asset to total asset ratio came 0.21, 0.16 and 0.18 in the year 2008-2009,
2009-2010 and 2010-2011.
g) Current liability to total asset ratio came 0.24 in 2008-2009, in 2009-2010 it came
0.26, and in 2010-2011 it came to 0.32:1.
h) Cash conversion ratio for inventory came 43 days, 115 days and 122 days. Cash
conversion for debtor comes 57 days in 2008-2009, and it increased to 126 days in
2009-2010. But in 2010-2012 it decreased to 119 days. Cash conversion ratio came to
37days, 86days and 98days respectively.
32
THE SECOND SECTION EXPLAINS ABOUT THE LIQUIDITY TREND OF THE ORGANIZATION.
proceed from share capital 71,94,45,000 5,00,00,000 23,05,55,000
CASH FLOW FROM FINANCING ACTIVITIES (D)
-82,26,58,095 -3,30,70,16,446 -1,78,57,51,383
NET CASH GENERATED FROM ALL ACIVITIES (A+B+C+D)
-14,76,73,010 -17,99,13,621 41,61,38,567
Cash and cash equivalent at the beginning of the year
72,71,06,129 90,70,19,750 49,08,81,183
cash equivalent at the end of the period 57,94,33,119 72,71,06,129 90,70,19,750
Table 5.7 defines the following:
a) Cash generated from investing activities, Rs-1,730,727,631 , Rs-88,86,44,331 and
Rs-84,78,28,424 in the year 2010-2011, 2009-2010 and 2008-2009 respectively.
b)Hence, there is a generation of Rs1,730,727,631 cash flow from its operating
activities for the year 2011-2010, where as in 2009-2010, it was Rs.4,01,57,47,156 and
where as in 2008-2009, it was Rs.3,04,97,18,374.
c) The net cash flow of Rs-82,26,58,095 from financing activities in 2011-2010.
Whereas it was Rs-3,307,016,446 and Rs-1,785,751,383 in year 2010-2009 and 2009-
2008 respectively.
38
d)That, the net cash flow from its operating, investing and financing activities for the
year 2010-2011 and 2009-2010 is in negative figure of Rs-147,673,010 and Rs.-
17,99,13,621 respectively. And it became positive in the year 2008-2009, which was Rs
41, 61, 38,567.
The Third Section Explains About The Working Capital Trend
Table-5.8
Size of Working Capital:
CURRENT ASSETS(CA) 2009(rupees) 2010(rupees) 2011(rupees)Stores and spares 80,85,19,278 96,90,56,460 1,14,42,69,951Sundry debtors 1,05,50,97,473 1,05,56,31,698 1,55,87,35,700
Cash and bank balances 90,70,19,750 72,71,06,129 57,94,33,119Other current assets 66,69,51,629 74,48,94,758 75,13,33,069Loan and advances 2,86,87,25,189 1,58,26,86,333 40,47,66,300
Total 6,30,63,13,319 5,07,93,75,378 4,43,85,38,139Less: CURRENT
working capital( CA-CL) -98,71,75,330 -3,13,42,88,896 -3,98,49,43,728
From the table -5.8 following things are derived:
39
(Amount. In Rs.)
In 2008-2009 working capital is Rs -987175330 due to excessive of provisions. In
2009-2010 working capital is Rs -3134288896 and in 2010-2011 working capital
became Rs – 3984943728. It became negative because current liabilities exceed current
assets in these years.
WORKING CAPITAL TREND ANALYSIS: In working capital analysis the
direction at changes over a period of time is of crucial importance. Working capital is
one of the important fields of management. It is therefore very essential for an analyst to
make a study about the trend and direction of working capital over a period of time.
Such analysis enables as to study the upward and downward trend in current assets and
current liabilities and its effect on the working capital position. “The term trend is very
commonly used in day-today conversion trend, also called secular or long term need is
the basic tendency of population, sales, income, current assets, and current liabilities to
grow or decline over a period of time” “The trend is defined as smooth irreversible
movement in the series. It can be increasing or decreasing.” Emphasizing the
importance of working capital trends, “analysis of working capital trends provide as
base to judge whether the practice and privilege policy of the management with regard
to working capital is good enough or an important is to be made in managing the
working capital funds.
TABLE-5.9
Working Capital Size trend
Years 2008-2009 2009-2010 2010-2011
Net W.C (A-B) -98,71,75,330 -3,13,42,88,896 -3,98,49,43,728
W.C. Indices -100 -317.50 -403.67
40
(Amount. In Rs.)
2008-2009 2009-2010 2010-2011
W.C trend -100 -317.5 -403.67
-425
-375
-325
-275
-225
-175
-125
-75
-25
WORKING CAPITAL TREND
Axis Title
From the table 5.9 followings things are derived: It is observed that working capital index in 2008-2009, 2009-2010 and 2010-2011 it became negative. Here in the year 2008-2009 and 2009-2010 current liabilities exceeded current assets. The company was unable to manage their working capital efficiently.
TABLE-5.10
WORKING CAPITAL TURN OVER RATIO- (SALES/NET WORKING CAPITAL)
Working capital turnover ratio
YEAR Cost of Sales Net working capital Ratio
2009 6789295427 -98,71,75,330 -6.88 times
2010 3051627568 -3,13,42,88,896 -0.97 times
2011 4051914743 -3,98,49,43,728 -1.02 times
41
2008-2009 2009-2010 2010-2011
W.C trend -6.88 -0.970000000000001 -1.02
-7.5
-6.5
-5.5
-4.5
-3.5
-2.5
-1.5
-0.5
WORKING CAPITAL TURNOVER RATIO
Rat
io
From the table 5.10 following things derived:
A) In the year 2008-2009, it was -6.88, there was decrease in net current assets due to
increase in current liabilities.
B) But in 2009-2010, working capital turnover was -0.97, which indicates there was
decrease in net current assets due to increase in current liabilities, which is better than
the previous year.
C) But in 2010-2011, working capital turnover was -0.97
TABLE 5.11
STATEMENT SHOWING CHANGES IN WORKING CAPITAL(2010 and 2011)
(2009-2010)(Rs)
(2010-2011)(Rs)
Increase in working capital
(Rs)
Decrease in working capital
(Rs)
Current Assets:
Stores and spares 96,90,56,460 1,14,42,69,951 17,52,13,491 -