8/9/2019 Final Project of Reliance Infra(2)
1/57
A Project on‘Working Capital Management of Reliance Infra’
Submitted to University of Mumbai in partial fulfillment of the requirement
for the award of the Degree of MASTERS IN MANAGEMENT STUIES !MMS"
S#$mitte% &'Geetal Thakare
B-! "#inan$e%
Bat$h &'(&-()
Un%er t(e G#i%ance of *rof+ Mayur Malviya
,.D/s S0MS
,.D/s Sterling 0nstitute of Management Studies
1ffiliated to the University of Mumbai
*lot ,o+ !23!214 Se$tor (!4 ,erul"5%4 ,avi Mumbai )'''6
Tel7 '&&-&'&&8&4 #a97 '&&-&&&&!'
1
8/9/2019 Final Project of Reliance Infra(2)
2/57
CERTIFICATE by the INSTITUTE
This is to certify that ___________________________________ (Name) a student
of ______ (discipline) _______ from ____________________________________
(Institute/University) has done/is doing his/her semester project at
__________________ from __________to __________under my guidance.
The project or! entitled "_______________________________________#
em$odies the original or! done $y___________________during his/her a$ove
full semester project training period.
%ate&
Name of the 'aculty uide uthori*e
+ignatory
___________________________
,lace -our ollege Name ith +tamp %irector
8/9/2019 Final Project of Reliance Infra(2)
3/57
EC)ARATI*N
0 hereby de$lare that the pro:e$t work entitled ;Working Capital Management of
Reliance Infra+ is a re$ord of an original work done by me under the guidan$e of *rof+
Mayur Malviya4 #a$ulty Member4 ,.D/s Sterling 0nstitute of Management Studies4 and
this pro:e$t has not performed the basis for the award of any Degree or Diploma and
similar pro:e$t if any+
Geetal Thakare
B-! "#inan$e%
Bat$h &'(&-&'()
0
8/9/2019 Final Project of Reliance Infra(2)
4/57
Ackno,le%gement
The su$$ess and final out$ome of this pro:e$t required lots of guidan$e and assistan$e
from many people and 0 am e9tremely fortunate to have got this all along the $ompletion
of my pro:e$t+
0 owe my profound gratitude to our Dire$tor Mr+
8/9/2019 Final Project of Reliance Infra(2)
5/57
INE-
S. No. Topic Page no.
( 5=5UT0>5 SUMM1.? /
& .5S51.< M5T051
) 0,T.@DUT0@, @# @.C0,G 1*0T1A 23 A1SS0#01T0@, @# @.C0,G 1*0T1A 246 1D5EU1? @# @.C0,G 1*0T1A 20 5>0AS @# 0,1D5EU1T5 @.C0,G 1*0T1A 218 @.C0,G 1*0T1A M1,1G5M5,T 35! 0M*@.T1,5 @# @.C0,G 1*0T1A M1,1G5M5,T 32(' #[email protected] D5T5.M0,0,G @.C0,G 1*0T1A
.5EU0.5M5,TS
33
(( @.C0,G 1*0T1A #0,1,0,G 3/(& M5T1BA5S M1,1G5M5,T 31() @.C0,G 1*0T1A .1T0@ 77( 0,>5,T@.? M1,1G5M5,T 70(6
1,1A?S0S (7 .+ 0,#.1
83
(@M*1.0T0>5 1,1A?S0S
87
(8 @,AUS0@,S 48([email protected]*
8/9/2019 Final Project of Reliance Infra(2)
6/57
needs to operate+ 1 se$ond purpose of working $apital is addressing seasonal or $y$li$al
finan$ing needs+
orking $apital is the flow of ready funds ne$essary for the working of the enterprise+ 0t
$onsists of funds invested in $urrent asset of that asset4 whi$h in the ordinary $ourse of
business4 $an be turned into $ash within a brief period without undergoing redu$tion in
value and without disruption of organiation +0t also throws light on 5vils of inadequate
working $apital4 5vils of e9$essive working $apital4 .ole of $ash and bank in working $apital
management+
#urther the pro:e$t reveals about re$eivables management4 inventory management and
analysis of ratio+
1part from this the pro:e$t highlights the analysis of one $ompany - .elian$e 0nfra
3
8/9/2019 Final Project of Reliance Infra(2)
7/57
C9APTER 3
RESEARC9 MET9**)*G;
hapter dis$ussed the ob:e$tives of this study and in this pro:e$t 0 will dis$uss about the
resear$h methodology whi$h is followed to $arry out this pro:e$t i+e+ the universe4 lo$ale
of our study4 Sample sele$tion4 Data olle$tion4 data analysis and field e9perien$e+ 1s
in organiation like .elian$e 0nfra 4 working $apital $onstitute a ma:or portion of its
resour$es4 a thorough study of its working $apital management has been done broadly
$overing7 .e$eivables Management4 ash Management4 and 0nventory Management
*$jecti
8/9/2019 Final Project of Reliance Infra(2)
8/57
RE)E:ANCE *> T9E PR*?ECT
The working $apital management is $ru$ial for some industries as the $apital
required3blo$ked is different in ea$h $ase+ hen a $ompany has too little working
$apital4 it $an fa$e finan$ial diffi$ulties and may even be for$ed toward bankrupt$y+ This
is true of very small $ompany and billion-dollar organiation+ 1 $ompany with this
problem may pay $reditors late or even skip payments+ 0t may borrow money in an
attempt to remain afloat+ 0f late payments have affe$ted the $ompany/s $redit rating4 it
may have diffi$ulty obtaining a loan at an affordable interest rate+
0n some types of businesses4 it isn/t as mu$h of a problem to have a lower amount of
working $apital+ ompany that are operated on as $ash basis4 have fast inventory
turnovers4 and $an generate $ash qui$kly don/t ne$essarily need as mu$h working
$apital+ #or e9ample4 a gro$ery store might meet these requirements and do well with
less working $apital+
.elian$e 0nfra being a working $apital intensive $ompany requires knowing the effe$t of
its $urrent methods+ The $ompany made a team to study the working $apital
management and to $ondu$t a finan$ial analysis+ 1nd in the pro$ess we also determine
$redit worthiness of the $ompany as well as study its position with respe$t to its
$ompetitors+
5
8/9/2019 Final Project of Reliance Infra(2)
9/57
C9APTER 7
)ITERATURE RE:IEW
1 Study of orking apital Management of
ement 0ndustries in 0ndia
0nternational .efereed Hournal
(asst+ *rof+ 1$harekar Sa$hin >ilas >i:aya4 &prof+ Shingare >ishal Sundar .ama(
C+H+Somaiya ollege of S$ien$e F ommer$e4 >idyavihar "5% Mumbai I)'' '&
Bhimrao T+ *radhan4 ollege Shahpur
ement industry4 whi$h has been signed out from investigation in the present study4 is
indeed the
Ba$k bone of e$onomi$ growth in any $ountry+ 1 thi$k relationship has been found
between the
level of e$onomi$ growth and the quantum of $ement $onsumption in developed as well
developing $ountries+ ement industry4 through its forward linkages provides the
ma9imum stimulus to growth in other industry also+ @ne employee in $ement
manufa$turing a$tivity supports eight to ten persons in related a$tivities+ 0n 0ndia4 sin$e
independen$e4 great emphasis has been laid on the development of $ement industry+ 0t
is one of the key basi$ industries in 0ndia+ 0t plays dominant role in the national
e$onomy+ ement industry ranks se$ond after the 0ron and steel industry+ ement is
indispensable in building and $onstru$tion works+ The produ$tion and $onsumption of
$ement4 to a large e9tent4 indi$ates a $ountry/s progress+ The development of transport4
infrastru$ture4 irrigation and power pro:e$ts et$+ depends to a very large e9tent on the
availability of the $ement+
The per $apita $onsumption level of $ement is regarded as one of the indi$ators of
development and standard of living in a nation+ Ceeping in mind the above importan$e
of the $ement industry in the e$onomi$ development4 it is required to do an in- depth
6
8/9/2019 Final Project of Reliance Infra(2)
10/57
study of the problems fa$ed by the industry espe$ially in the area of working $apital
management+ The study aims to analyse the working $apital issues like liquidity and
profitability aspe$ts of the working $apital management+ 0t also analyse the various
sour$es of working $apital finan$e
Strategies for improving working capital management $' orot(' R#le@ irector
an% Glo$al 9ea% of )i#i%it' an% In
8/9/2019 Final Project of Reliance Infra(2)
11/57
The new li$!idit# paradigm% Foc!s on working capital% The arti$le fo$uses on the
efforts of $orporate treasurers to improve working $apital management in line with the
emergen$e of the new liquidity paradigm brought about by the re$ent e$onomi$ $risis+ 0t
outlines some of the $ommon misper$eptions about working $apital optimiation
initiatives+ 0t presents the findings of an in-depth analysis of working $apital-intensive
industries $ondu$ted by itiJs #inan$ial Strategy Group+ 0t dis$usses the $omponents of
working $apital su$h as pro$ure to pay and order to $ash+
11
8/9/2019 Final Project of Reliance Infra(2)
12/57
C9APTER 8
INTR*UCTI*N *> W*RBING CAPITA)
orking $apital is the employment of $urrent assets and $urrent liabilities in su$h a way
as to in$rease short-term liquidity+ orking $apital management is a signifi$ant fa$t of
finan$ial management due to the fa$t that it plays a $ru$ial role in keeping the wheels
of business enterprise running+ orking $apital management is $on$erned with the
short-term finan$ial de$isions4 whi$h have been $omparatively negle$ted in the
literature of finan$e+ Shortage of funds for working $apital has $aused many
businesses to fail+ Aa$k of effi$ient and effe$tive utiliation of working $apital leads to
low rate of returns on $apital employed or even $ompels to sustain loses+ The need for
skilled working $apital has be$ome greater in re$ent years+
1 firm usually invests a part of its permanent $apital in fi9ed assets and keeps a part of
it for working $apital4 for e9ample meeting day-to-day requirements+ The requirement of
working $apital varies from firm to firm4 depending on the nature of business4
produ$tion poli$y4 market $onditions4 seasonality of operation4 $ondition of supply et$+
orking $apital to a $ompany is like a blood of human body+ 0t is the most vital
ingredient of business+ orking $apital if $arried out effe$tively and effi$iently and
$onsistently4 will assure the health of an organiation+
5very organiation has to arrange for adequate funds for meeting day-to-day
e9penditure4 apart from investment from fi9ed assets+ orking $apital is the flow of
ready funds ne$essary for the working of the enterprise+ 0t $onsists of funds invested in
$urrent asset of that asset4 whi$h in the ordinary $ourse of business4 $an be turned into
$ash within a brief period without undergoing redu$tion in value and without disruption
of organiation+ urrent liabilities are those indented to be paid in ordinary $ourse of
business within a short period of time+
1
8/9/2019 Final Project of Reliance Infra(2)
13/57
Working capital =er
8/9/2019 Final Project of Reliance Infra(2)
14/57
E>INITI*N *> W*RBING CAPITA)
0n $ase of gross working $apital4 it is the $on$ept that fo$us attention of two aspe$ts of
$urrent asset management7
(+ @ptimum investment in $urrent asset+
&+ #inan$ing of $urrent assets+
#ollowing definitions of working $apital pla$e emphasis on gross working $apital+
2. Accor%ing to Mea%@ Mallot >iel%. FWorking capital means current assets+.
3. Accor%ing to &onne
8/9/2019 Final Project of Reliance Infra(2)
15/57
C9APTER 4
C)ASSI>ICATI*N *> W*RBING CAPITA)
orking $apital may be $lassified on the fallowing basis7
2. *n t(e $a=i= of concept
0+ Gross working $apital "represented by the total $urrent asset%+
00+ ,et working $apital "e9$ess of $urrent asset over $urrent liabilities%+
3. *n t(e $a=i= of perio%icit' of re#irement=
>ie% or permanent ,orking capital 0t represents that part of $apital permanently lo$kedup in the $urrent asset to $arry out the business smoothly+ This investment in $urrent asset
in$rease as the sie of business e9pands+ 59amples of su$h investment are those required
to maintain the minimum sto$k of raw material4 work in progress4 finished produ$ts4 loose
tools and equipments+ This arrangement requires minimum $ash balan$e to be kept in
reserve for payment of wages salaries and all other $urrent e9penditure throughout the
year+
T(e permanent fie% ,orking capital ma' again $e =#$%i
8/9/2019 Final Project of Reliance Infra(2)
16/57
:aria$le ,orking capital >ariable working $apital $hanges with the in$rease or de$rease
in the volume of business+
It ma' $e =#$%i
8/9/2019 Final Project of Reliance Infra(2)
17/57
C9APTER /
AEJUAC; *> W*RBING CAPITA)
orking $apital or investment in $urrent asset is a must for meeting the day-to-day
e9penditure on salaries4 wages rent4 advertising et$ and for maintaining the fi9ed asset+
Aarge-s$ale $apital in fi9ed asset is often determined by relatively small amount of $urrent
asset+ The heart of industry4 working $apital4 if weak the business $annot prosper and
survive4 although there may be a large investment of fi9ed assets+ 0nadequate as well as
superfluous working $apital is dangerous for the health of the industry+N
0nadequate working $apital is disastrous4 whereas superfluous working $apital is a $riminal
wasteN+ Both situations are unwarranted in a sound business organiation+ 1dequa$y of
working $apital is the lifeblood and $ontrolling nerve $enter of a business+
Some of t(e #=e= of a%e#ate ,orking capital are
2" CAS9 ISC*UNT By adequate working $apital the business $an avail the advantage of
$ash dis$ount by paying $ash for the purpose of raw material and mer$handise+ 0f proper
$ash balan$e is maintained4 this will redu$e the $ost of produ$tion+
3" SENSE *> SECURIT; AN C*N>IENCE 1dequate working $apital $reate a sense
of se$urity4 $onfiden$e and loyalty throughout the business and also among its
$onsumers4 $reditors and business asso$iates +The proprietor4 offi$ial or manager of a
$on$ern are $arefree4 if they have proper $apital arrangements be$ause they need not
worry for the payment of business e9penditure or $reditors+
7" S*):ENC; AN C*NTINU*US PR*UCTI*N7 0n order to maintain the solven$y of
business4 it is essential that suffi$ient amount of funds are available to make all the
payments in time as and when they are due+ 0n the absen$e of working $apital4
produ$tion will suffer in the era of $utthroat $ompetition and business $an never flourish
in the absen$e of adequate working $apital+
8" S*UN G**WI)) AN INCREASE E&T CAPACIT; *romptness of payment in
business $reates goodwill and in$reases the debt $apa$ity of the firm+ 0f the investors and
borrowers are $onfident that they will get their due interest and payment of prin$iple in time4
14
8/9/2019 Final Project of Reliance Infra(2)
18/57
a firm $an raise funds from market4 pur$hase goods on $redit and borrow short term loans
from bank et$+
4" EAS; )*ANS >R*M T9E &ANB 1n adequate working $apital helps the $ompany to
borrow unse$ured loans from the bank4 be$ause the e9$ess provides a good se$urity to the
unse$ured loans+ 0f the business has a good $redit standing and trade reputation4 bank
favors in granting seasonal loans+
/" ISTRI&UTI*N *> I:IEN Short of working $apital4 a $ompany $annot distribute
dividend to its shareholders in spite of suffi$ient profits+ To make up for the defi$ien$y of
working $apital4 profits are to be retained in business+ @n the other hand ample dividend
$an be de$lared and distributed to the market value of share and in$rease by suffi$ient
working $apital+
0" E-P)*ITATI*N *> G** *PP*RTUNITIES7 Good opportunity $an be e9ploited
through adequa$y of $apital in a $on$ern+ #or e9ample I 1 $ompany may make off seasons
pur$hase4 resulting in substantial saving or it $an fet$h big supply orders resulting in good
profits+
6" MEETING UNSEEN C*NTINGENC; 1s sto$k piling of finished goods be$omes
ne$essary4 depression shoots up the working demand of $apital+ 0f a $ompany maintain
adequate working $apital4 unseen $ontingen$ies su$h as finan$ial $risis due to heavy loses4
business os$illation et$ $an easily be over$ome+
1" INCREASE IN E>>ICIENC; *> >I-E ASSETS *roper maintenan$es/ and adequate
working $apital in$rease the effi$ien$y of fi9ed asset of business+ 0t has been rightly said ,”
the fate of large s$ale investment in fi9ed $apital is often determined by a relatively small
amount of $urrent asset+N
15
8/9/2019 Final Project of Reliance Infra(2)
19/57
25" 9IG9 M*RA)E The provision of adequate working $apital improves the morale of the
e9e$utive as they get an environment of se$urity4 $ertainty and $onfiden$e4 whi$h is a great
psy$hologi$al fa$tor in improving the overall effi$ien$y of business and of the person who is
at the helm of affair in the $ompany+ C9APTER 0
E:I)S *> INAEJUATE W*RBING CAPITA)
Some of the evils of not having adequate working $apital in a business firm or a
$ompany are as follows7
(% )*SS *> CREIT W*RT9INESS AN G**WI)) 1 firm losses its $redit
worthiness and goodwill if it fails to honors its $urrent liability+ 0t finds it diffi$ult to pro$ure
the required funds for its business operation on easy terms+ This leads to redu$edprofitability and produ$tion interruption+
3" N* &ENE>IT >R*M >A:*RA&)E *PP*RTUNIT; ith inadequate working
$apital a firm fails to undertake profitable pro:e$ts+ 0t prevents the firm from availing the
benefit of available opportunity and stagnate its growth+
7" >AI)URE T* A:AI) CREIT *PP*RTUNIT; Due to inadequate working $apital a
firm fail to avail attra$tive $redit opportunities+
)% *PERATING INE>>ICIENCIES 0nadequate working $apital leads to operating
ineffi$ien$ies4 as day-to-day $ommitment $annot be met+
% )*W RATE *> RETURN *N >I-E ASSET 0nadequate working $apital leads to a
lowering down of rate of returns of fi9ed asset4 as it $annot be effi$iently utilied or
maintained due to inadequa$y of working $apital+
6% INCREASE IN &USINESS RISBS 0nadequate working $apital in$reases the
business risk of the firm+ Unable to dis$harge its $urrent liability it is liable to be de$lared as
insolvent+ Thus inadequate working $apital posses a serious threat to the working and
survival of the firm+
% CANN*T AC9IE:E PR*>IT TARGET Due to inadequate working $apital the firm
$annot a$hieve its profit target4 as it $annot put into operation4 its operating plans due to
shortage of working $apital+
16
8/9/2019 Final Project of Reliance Infra(2)
20/57
8% )*W M*RA)E *> &USINESS E-ECUTI:ES 0nadequate working $apital
adversely lowers the morale of the firm/s e9e$utive4 as they do not have an environment of
$ertainty safety and $onfiden$e4 whi$h is ne$essary psy$hologi$al fa$tor in improving the
overall effi$ien$y of a business firm+
C9APTER 6
W*RBING CAPITA) MANAGEMENT
orking $apital is the money used to make goods and attra$t sales+ The less working
$apital is used to attra$t sale4 the higher is it likely to be the return of investment+ orking
$apital management is about the $ommer$ial and finan$ial aspe$t of inventory4 $redit4
marketing4 royalty and investment poli$y+ The higher the profit margin4 lower is it likely to be
the level of working $apital tied up in $reating and selling titles+ The faster that we $reateand sell the books the higher is it likely to be the return on investment+
No, let #= look at =ome of t(e %efinition= of ,orking capital management
PR*> B : SMIT9 ;orking $apital management is $on$erned with problems that arise in
attempting to manage the $urrent asset4 the $urrent liability and the interrelation that e9ist
between themN+
WEST*N AN &RIG9AM Forking $apital management refer to all aspe$t of
administration of both $urrent asset and $urrent liabilityN+
?AMES C :AN 9*RNE ;urrent asset4 by definition are asset normally $onverted into
$ash within one year+ orking $apital management is $on$erned with the administration of
these asset-namely $ash and marketable se$uritiesN+
No, let #= look at =ome of t(e main an% important o$jecti
8/9/2019 Final Project of Reliance Infra(2)
21/57
)+ The $ompany should always be in a position to meet its $urrent obligation4 whi$h should
be properly supported by $urrent assets available with the firm+ Maintaining e9$ess fund in
working $apital means lo$king of funds without any returns+
+ To lo$ate appropriate sour$e of short term finan$ing+
C9APTER 1
IMP*RTANCE *> W*RBING CAPITA) MANAGEMENT
1$$ording to 9#=$an% an% 9ocker'@ Nthe prime ob:e$t of management is to make a profit4
either or not this is a$$omplished4 depend on the manner in whi$h working $apital is
a$$omplishedN+ The primary ob:e$t of working $apital is management is to manage the
firm/s $urrent asset and $urrent liability in su$h a manner that a satisfa$tory level of working$apital is maintained+ The firm may be$ome insolvent if it $annot maintain a satisfa$tory
level of working $apital+ orking $apital assist in in$reasing the profitability of the $on$ern+
The working $apital position de$ide the various poli$ies in the business with re$eipt to
general operation vi importan$e of working $apital+
Po=iti
8/9/2019 Final Project of Reliance Infra(2)
22/57
C(apter 25
>ACT*RS ETERMINING W*RBING CAPITA) REJUIREMENTS
,ow let us look at the various fa$tors determining the working $apital requirement in a
business firm7
!A" Nat#re of $#=ine==e= The amount of working $apital is related to the nature of
business+ 0t $on$erns4 where the $ost of raw material used in manufa$ture of a produ$t is
very large in produ$tion to its total $ost of manufa$ture4 the requirement of working $apital
will be very large+ #or instan$e a $otton or sugar mills require a large amount of working
$apital+ @n the other hand firms requiring large amount of investment in fi9ed asset require
less working $apital+ *ubli$ utility $on$ern like 0ndian .ailways4 require a lesser amount of
working $apital as $ompared to trading or manufa$turing $on$ern4 partly be$ause of $ash
nature of their business and partly be$ause4 they are selling servi$e instead of a $ommodity
and there is no need of maintaining inventories+
!&" SiKe of $#=ine== #nit The general prin$iple in this regard is that the bigger the sie of
business4 the larger will be the amount of working $apital required4 be$ause the larger
business unit are required to maintain big inventories for the flow of the business and to
spend more in $arrying out the business operation smoothly+
!C" Sea=onal
8/9/2019 Final Project of Reliance Infra(2)
23/57
8/9/2019 Final Project of Reliance Infra(2)
24/57
of working $apital+ Terms and $onditions of pur$hase and sale are generally governed by
prevailing trade pra$ti$e and by $hanging e$onomi$ $onditions+
!I" Con
8/9/2019 Final Project of Reliance Infra(2)
25/57
rightfully used+ 5ven if the net profit is earned in $ash4 whole of it is not available for
working $apital purpose+ The $ontribution towards working $apital is effe$ted by the way in
whi$h profit are appropriated and affe$ted by ta9 a$tion4 dividend4 depre$iation and reserve
poli$y+
!M" Price le
8/9/2019 Final Project of Reliance Infra(2)
26/57
C9APTER 22
W*RBING CAPITA) >INANCING
The main sour$e of working $apital finan$ing4 namely4 trade $redit4 bank $redit4 .B0
framework3regulation of bank $redit3finan$e3advan$es4 fa$toring and $ommer$ial papers will
be dis$ussed in this $hapter+
2. TRAE CREIT7 Trade $redit refers to the $redit e9tended by the suppliers of goods and
servi$e in normal $ourse of transa$tion3business3sale of the firm+ 1$$ording to trade
pra$ti$e4 $ash is not paid immediately for pur$hase but after an agreed period of time+
There is however4 no formal3spe$ifi$ negotiation of trade $redit 0t is an informal
arrangement between buyer and seller+ There is no legal instrument of a$knowledgement
of debt4 whi$h is granted on an open a$$ount basis+
!a" A:ANTAGES - Trade $redit as a sour$e of short-term working $apital finan$e has
$ertain advantages+ 0t is easily available+ Moreover it is fle9ible and spontaneous sour$e of
finan$e+ The availability and magnitude of trade $redits is related to the sie of operation of
a firm in relation to sales3pur$hase+ 0f the $redit pur$hase of goods de$line4 availability of
$redit will also de$line+ Trade $redit is also an informal4 spoteganous sour$e of finan$e+ ,ot
requiring negotiation and formal agreement4 trade $redit is free from the restri$tion
asso$iated with formal3negotiated sour$e of finan$e3$redit+
3 .C*ST Trade $redit does not involve any e9pli$it interest $harged+
8/9/2019 Final Project of Reliance Infra(2)
27/57
8/9/2019 Final Project of Reliance Infra(2)
28/57
C9APTER 23
MET9*S *> ESTIMATING W*RBING CAPITA) REJUIREMENT
No, let #= look at =ome of t(e ,a'= #=e% $' a $#=ine== firm in e=timating t(e
,orking capital re#irement
*perating c'cle met(o%7 @perating $y$le is a period that a business enterprise takes in
$onverting $ash ba$k into $ash+
It (a= t(e fallo,ing fo#r =tage=.
• The raw material and stores inventory stage+
• The semi finished goods or work in progress stage
• The finished goods inventory stage+• The a$$ounts re$eivable and book debt stage+
5a$h of he above stage is e9pressed in terms of days of relevant a$tivity+ 5a$h requires
a level of investment to support it+ The sum of these stage wise investments will be total
amount of working $apital of the firm+ The fallowing formulae $an be used to e9press the
framework of the operating $y$le+
T !S C" W > &
here
T Stands for the total period of operating $y$le in number of days
R Stands for the number of days of raw material and stores
onsumption requirement held in raw material and store
0nventory
C The number of days of pur$hase in trade $reditors
W The number of days of $ost of produ$tion held in +0+*
> The number of days of $ost of sales held in finished goods
& The number of days of sale in book debt
5
8/9/2019 Final Project of Reliance Infra(2)
29/57
C9APTER 27
RECEI:A&)ES MANAGEMENT
The re$eivables represent an important $omponent of $urrent asset of a firm+ Thepurpose of this $hapter is to analye the importan$e of effi$ient management of
re$eivables4 within the framework of a firm/s ob:e$tive of value ma9imiing+ The first se$tion
of this $hapter dis$usses the ob:e$tive of re$eivables management+ This is followed by an
indebt analysis of three $ru$ial aspe$t of management of re$eivables+
Before understanding the ob:e$tives of re$eivables management let us first understand
the two $on$epts4 whi$h forms an important part in re$eivables management4 namely
debtors and $reditors+
e$tor= Debtors "1$$ounts .e$eivable% are $ustomers who have not yet made payment
for goods or servi$es4 whi$h the firm has provided+ The ob:e$tive of debtor management is
to minimie the time-lapse between $ompletion of sales and re$eipt of payment+
T(e co=t= of (a
8/9/2019 Final Project of Reliance Infra(2)
30/57
8/9/2019 Final Project of Reliance Infra(2)
31/57
may wish to en$ourage suppliers to a$$ept this option+
8/9/2019 Final Project of Reliance Infra(2)
32/57
8.efa#lt co=t #inally the firm may not be able to re$over the overdue be$ause the
inability of the $ustomers to pay+ Su$h that are treated as bad debts and have to be written
off4 as they $annot be realied is $alled default $ost+
&enefit=
The benefits are in$reased sales and anti$ipated profits be$ause of a more
liberal poli$y+ hen firms e9tend trade $redits4 that is4 invest in re$eivablesK they intend to
in$rease the sales+ The impa$t of liberal trade $redit poli$y is likely two take two forms+ #irst
it is oriented to sales e9pansion+ 0n other words a firm may grant trade $redit to in$rease
sale to e9isting $ustomers+ Se$ondly the firm gives trade $redit to prote$t its $urrent sales
against $ompetitions+
Cre%it policie=
The $redit poli$y of the firm provides a framework to determine "a% whether or not
to e9tend $redit to a $ostumer "b% how mu$h $redit to e9tend+
T(e cre%it polic' %eci=ion of a firm (a= t,o $roa% %imen=ion=
(+redit standards
&+redit analysis
0
8/9/2019 Final Project of Reliance Infra(2)
33/57
C9APTER 28
W*RBING CAPITA) RATI*
orking $apital ratios indi$ate the ability of a business $on$ern in meeting its $urrent
obligation as well as its effi$ien$y in managing the $urrent asset in the generation of sales+
These ratios are applied to evaluate the effi$ien$y with whi$h the firm manages and make
use of its $urrent assets+ The fallowing three $ategories of ratio are used for effi$ient
management of working $apital "a% effi$ien$y ratios "b% Aiquidity ratios "$% Stru$tural health
ratios+
Efficienc' ratio This ratio is $omputed by dividing the working $apital by sale+ This ratio
helps to measure the effi$ien$y of utiliation of networking $apital+ 0t signifies for an amount
of sale a relative amount of working $apital is needed+ 0f any in$rease in sale is
$ontemplated4 working $apital should be adequate and thus this ratio is useful for
maintaining adequate level of working $apital+
In
8/9/2019 Final Project of Reliance Infra(2)
34/57
rate indi$ates redu$ed lo$k up of funds in $urrent assets+ 1n analysis of this ratio over a
period of time refle$ts working $apital management of a firm+
)i#i%it' ratio This ratio indi$ate the e9tend of soundness of the $urrent finan$ial position
of an undertaking and the degree of safety provided to the $reditors+ The higher the $urrentratio4 the larger amount of rupee available4 per rupee for $urrent liability4 the more the firms
ability to meet $urrent obligation and the greater safety of funds of short term $reditors+ The
liquidity ratio formulae is
LI.&I/IT0 )TI* , C&'(T )SS'T1 L*)(S1 )/+)(C'S C&'(T LI)"ILIT0
urrent assets are those assets4 whi$h $an be $onverted into $ash within an a$$ounting
year+ urrent liability and provisions are those liability that are payable within a year+ 1
$urrent ratio of &7 ( indi$ates a highly solvent position+ Banks $onsider a $urrent ratio of (7
27 ( as minimum a$$eptable level for providing working $apital finan$e+ The $onstituents of
the $urrent asset are as important as $urrent asset themselves for evaluation of $ompanies
solven$y position+
J#ick ratio This ratio is a more refined tool to measure the liquidity of an organiation+
0t is a better test of finan$ial strength than the $urrent ratio4 be$ause it e9$ludes very slow
moving inventories and the item of $urrent asset4 whi$h $annot be $onverted into $ash
easily+ This ratio shows the e9tend of $ushion of prote$tion provided from the qui$k assetsto the $urrent $reditors+ 1 qui$k ratio of (7 ( is usually $onsidered satisfa$torily through it is
again a rule of the thumb only+
Str#ct#ral (ealt( ratio This ratio e9plains the relationship between $urrent asset and total
investment in $urrent asset+ 1 business enterprise should use its $urrent asset effe$tively
and e$onomi$ally be$ause it is out of the management of these assets that profits a$$rue+
1 business will end up in losses if there is any la$una in managing assets to the advantage
of business+ 0nvestment in fi9ed assets being inelasti$ in nature there is no elbowroom tomake an amendment in this sphere and its impa$t on profitability remains minimal+ This
stru$tural ratio $an be indi$ated as
S.9.R NET ASSETS L CURRENT ASSET
0
8/9/2019 Final Project of Reliance Infra(2)
35/57
1n analysis of $urrent assets $omposition enable one to e9amine in whi$h $omponents the
working $apital funds are lo$ked up+ Aarge tie up of funds in inventories effe$t profitability of
the business adversely owing to $arry over $ost +in addition losses are likely to o$$ur by the
way of depre$iation4 de$ay4 obsoles$e4 evaporation and so on+ .e$eivable $onstitute
another $omponent of $urrent assets 0f the ma:or portion of $urrent assets are made of
$ash alone the profitability will be de$reased be$ause $ash is a non earning asset+ 0f the
portion of $ash balan$e is e9$essive then it $an be said that management is not effi$ient to
employ surplus $ash+
e$tor t#rno
8/9/2019 Final Project of Reliance Infra(2)
36/57
CREIT TURN*:ER PERI* CREIT*RS 7/4 L PURC9ASES.
03
8/9/2019 Final Project of Reliance Infra(2)
37/57
Some of t(e ='mptom= of poor ,orking capital management are
(+ 59$essive $arriage of inventory over the normal levels required for business will result in
more balan$e in trade $reditors a$$ount+ More $reditors balan$e will $ause strain on the
management in management of $ash+
&+ orking $apital problem will arise when there is a show down in $olle$tion of debtors+
2+ Sometimes $apital goods will be pur$hased from the funds available for working $apital+
This will result in the working $apital and its impa$t on the operation of the $ompany+
)+ Unplanned produ$tion s$hedule will $ause e9$essive sto$k of finished goods or failure in
meeting dispat$h s$hedule+ More funds kept in the form of $ash will not generate any profit
for the business+
+ 0neffi$ien$y in using potential trade $redit require more funds for finan$ing working
$apital+
6+ @vertrading will $ause shorta ge of working $apital and its ultimate effe$t is on the
operation of the $ompany+
+ Dependen$e in short term sour$e of finan$e for finan$ing permanent working $apital$auses less profitability and will in$rease strain on management in managing working
$apital+
8+0neffi$ien$y in $ash management will $ause embelement of $ash
04
8/9/2019 Final Project of Reliance Infra(2)
38/57
C(apter 24
IN:ENT*R; MANAGEMENT
0nventories symbolie the se$ond largest asset $ategories for manufa$turing $ompanies4
ne9t only to plant and equipments+ The proportion of inventories to total asset varies
between fifteen to thirty per$ent+ 0nventories are sto$ks of the produ$t a $ompany is
manufa$turing for sale and $omponent that make up the produ$t+ There are three types of
inventories7 raw materials4 work in progress and finished goods+ .aw materials are
materials and $omponents that are inputs in making the final produ$t+ The work in progress4
also $alled sto$k in progress4 refer to goods in intermediate stage of produ$tion+ #inished
goods $onsist of the final produ$ts that are ready for sale+ hile manufa$turing firms
generally hold all three types of inventories4 distribution firms hold mostly finished goods+ 1s inventory management has important finan$ial impli$ation4 the finan$ial manager has
the responsibility to ensure that the inventory properly monitored and $ontrolled+
T(e t(ree general moti
8/9/2019 Final Project of Reliance Infra(2)
39/57
to meet delivery $ommitments+ The aim of inventory management thus should be to avoid
e9$essive and inadequate level of inventories and to maintain suffi$ient inventories for
smooth produ$tion and sales operation+ 5fforts should be made to pla$e an order at the
right time and with the right sour$e to a$quire the right quantity at he right pla$e and quality+
An effecti
8/9/2019 Final Project of Reliance Infra(2)
40/57
EC*N*MIC *RER JUANTIT;
There are two basi$ questions that should be $onsidered in inventory management namely
"a% hat should be the sie of orderO "b% 1t what level should the order be pla$edO
T(i= incl#%e= t(ree t'pe= of co=t
(+ *r%ering co=t7 0t relates to pur$hased items that in$lude e9pense on fallowing7
requisitioning4 preparation of pur$hase order4 e9pediting4 transport and re$eiving and
pla$ing in storage+
3. Carr'ing co=t7 0t in$ludes e9penses on interest on $apital lo$ked up in inventory4
storage4 and insuran$e4 obsoles$e and ta9es+ arrying $ost generally are &P of the value
of inventory held+
7. Storage co=t 0t arises when inventories are short of requirement for meeting the need
of produ$tion or demand of $ustomers+ 0nventory shortage may result in high $ost4 less
effi$ient and une$onomi$ produ$tion s$hedules4 $ustomer dissatisfa$tion and loss of sale+
Thus when a firm order in large quantities4 in a bid to redu$e the total ordering $ost4 the
average inventory4 other things being equal4 tends to be high thereby in$reasing the
$arrying $osts+ 0n view of su$h relationship4 minimiation of overall inventory management
would require a $onsideration of trade off among these $osts+
#or determining Economic *r%er J#antit' formula the fallowing symbols are used7
U 1nnual usage3demand
E Euantity ordered
# ost per order
*er$ent $arrying $ost
* *ri$e per unit
T Total $ost of ordering and $arrying
T.C U > J P C
The total $ost of ordering and $arrying $ost is minimied when
7
8/9/2019 Final Project of Reliance Infra(2)
41/57
J O 3 >U L PC
STRATEGIES IN W*RBING CAPITA) MANAGEMENT
1t present more finan$e option are available to the finan$e manager to see the operation of
his firm go smoothly+ Depending on the risks of business strategies is evolved to manage
the working $apital+
Con=er
8/9/2019 Final Project of Reliance Infra(2)
42/57
defaults+ 0t is a $ardinal prin$iple of $orporate finan$e that long term sour$e and short-term
assets should finan$e long term asset by a mi9 of long and short-term sour$e+
5ffi$ient working $apital management te$hniques are those that $ompressed operating
$y$le+ The length of operating $y$le is equal to the sum of the length of the inventory periodand the re$eivable period+ Just in time inventory management te$hniques redu$e $arrying
$ost by slashing the time that goods are parked as inventories+ To shorten the re$eivables
period without ne$essary redu$ing the $redit period4 $orporate $an offer trade dis$ount for
prompt payment+
8/9/2019 Final Project of Reliance Infra(2)
43/57
ANA);SIS 2
R. IN>RA
CURRENT SCENARI*
.0nfra4 the infrastru$ture development arm of the 1nil 1mbani-led .elian$e Group
reported a 66+2P growth in its net sales on $onsolidated basis to Q6(42'&+ million in
E2#?‟(&4 driven by higher sales from its engineering and $onstru$tion "5*% business
and ele$tri$al segment+ The 5* business $lo$ked revenue of Q&!4)'+! million4 up
(+(P on ?o? basis4 as it largely undertakes $onstru$tion of in-house pro:e$ts and is
benefiting from a large number of pro:e$ts that are under $onstru$tion+ @n $ontrary4
operating profit margin "@*M% depre$iated by &&'bps to (2+'P on ?o? basis4 due to
(!2+6P rise in material $ost F sub $ontra$t $harges4 whi$h in turn $apped the operating
profit growth of the $ompany to )&+P ?o? at Q!+ million+ @wed to ('!+P rise in
interest $harges and (2P rise in ta9ation $harges4 the *1T before share of profit from
asso$iate and minority interest reported a de$line of 8P in E2#? ‟(& on ?o? basis at
Q24(86+ million as against Q24)68+8 million in E2#?‟((++ 1s a result4 the ,*M
depre$iated by )('bps ?o? to 6+P+ .0nfra‟s 5* business reported in$ome of
Q&!4)'+! million in E2#?‟(&4 up (+(P ?o? driven by better e9e$ution in .*ower
pro:e$ts+ 1s on De$ember &'((4 5* segment had an order book position of Q&(4'
million+ The order book $omprises of 6 power pro:e$ts of over !4!'' M4 one
transmission pro:e$t of (4'' kms along with 6 road pro:e$ts totaling ' kms+ #urther4
revenue from the ele$tri$ity and infrastru$ture business grew by &'+2P and !+8P
respe$tively on ?o? basis+ The $ompany has also added (!'4''' $ustomers in its
power distribution $ir$les in Mumbai and Delhi in &'((+ The units sold in Mumbai and
Delhi stood at (4!! million "-((+&P ?o?% and 2428 million "R8+)P ?o?% respe$tively+Besides4 the $ompany is developing (( road pro:e$ts out of whi$h its pro:e$ts are
already operational4 while five additional would begin generating revenue in ne9t three
months+ Meanwhile4 the total assets under B@T basis reported a growth of !6P ?o? at
Q8' million and with the indu$tion of Mumbai metro into B@T portfolio will add value for
the $ompany+
0
8/9/2019 Final Project of Reliance Infra(2)
44/57
C*MPARITI:E ANA);SIS
0n order to determine the performan$e of relian$e infrastru$ture on the front of working
$apital management4 we have a$$umulated data for the last five years and tried to
analye the going of relian$e infra on various fronts of working $apital+ 0n this way4 we‟ll
be able to better understand the nature of $hange "if any% in the working $apital situation
of the organisation+
So first we‟ll look at various working $apital ratios for the past five years and e9amine
the findings+
W*RBING CAPITA) RATI*
The differen$e between $urrent assets and $urrent liabilities e9$luding short term bank
borrowing is $alled net working $apital ",%+ ,et orking apital is sometimes used
as a measure of a firm‟s liquidity+
,et working $apital measures the firm/s potential reservoir of funds+
;EARS 3551 3525 3522 3523 3527
NETW*RBING
RATI*5.83 5.3/ 5.51 5.2/ 5.25
8/9/2019 Final Project of Reliance Infra(2)
45/57
2009 2010 2011 2012 2013
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.45
Column3
InterpretationD
1s it is shown in the graph4 the following observations $an be made7
(+ 1 $ompany having a higher , ratio has a greater ability to meet its $urrent
obligations+ #rom a $onservative position of &''! where the ratio was as high as '+)&4it
has now settled at '+(' whi$h is slightly on the lower side 1s this ratio represents a
firm/s potential reservoir of funds4 a de$lining trend should be taken seriously and
appropriate remedial measures need to be taken so as to avert a more troubled
situation+
2
8/9/2019 Final Project of Reliance Infra(2)
46/57
CURRENT RATI*
urrent ratio is $al$ulated by dividing $urrent assets by $urrent liabilities7
urrent assets in$lude $ash and those assets that $an be $onverted into $ash within a
year4 su$h as marketable se$urities4 debtors4 inventories4 loans and advan$es+ 1ll the
obligations maturing within a year are in$luded in $urrent liabilities+
urrent liabilities in$lude $reditors4 bills payable4 a$$rued e9penses4 short term bank
loan4 in$ome ta9 liability and long-term debt maturing in the $urrent year+
Significance
• 0t indi$ates the availability of $urrent assets in rupees for every one rupee of
$urrent liability+ 1 ratio of greater than one means that the firm has more $urrent
assets than $urrent $laims against them+ 0n 0ndia4 the $onventional rule is to have
a ratio of (+22"internationally it is &%+
• The $urrent ratio represents the margin of safety for the $reditors+ The higher the
$urrent ratio4 the greater the margin of safetyK the larger the amount of $urrent
assets in relation to $urrent liabilities4 the more the firm/s ability to meet its$urrent obligations+
;EARS 3551 3525 3522 3523 3527
CURRENT 3.11 3.32 5.14 2.81 2.51
3
8/9/2019 Final Project of Reliance Infra(2)
47/57
RATI*
2009 2010 2011 2012 2013
0
0.5
1
1.5
2
2.5
3
Column3
InterpretationD
#or the year &''!4 .elian$e 0nfra had a $urrent ratio of &+!! whi$h got offset during the
subsequent years rea$hing as low as '+! in &'((+The situation got better in &'(& with
a ratio of (+)! but again it has be$ome $riti$al with a ratio of (+'! at the end of #? (2 +1
$ompany with a falling $urrent ratio needs to take stri$t a$tions otherwise in longer run4
the firm $an found themselves in a diffi$ult situation to $lear their $urrent liabilities
4
8/9/2019 Final Project of Reliance Infra(2)
48/57
+ ACI RATI* TEST !)i#i%LJ#ick Ratio"
This ratio establishes the relationship between qui$k or liquid assets and $urrent
liabilities+
1n asset is liquid if it $an be $onverted into $ash immediately without a loss of value+
e+g+ ash4 Debtors4 Bills re$eivable and marketable se$urities+ 0nventories are
$onsidered to be less liquid as it requires time for realiing into $ash4 their value also
has tenden$y to flu$tuate+
Significance
Generally a qui$k ratio of (7( is $onsidered to represent a satisfa$tory $urrent finan$ial
$ondition+ This test is more signifi$ant as $ompare to $urrent ratio to fulfill the firm ‟s
obligations
;EARS 3551 3525 3522 3523 3527
ACIRATI*
3.66 3.23 5.61 2.88 2.5/
5
8/9/2019 Final Project of Reliance Infra(2)
49/57
2009 2010 2011 2012 2013
0
0.5
1
1.5
2
2.5
3
Column3
InterpretationD
.elian$e 0nfra has a qui$k ratio of (+'6 at the end of #?(2 whi$h is $onsistent with the
$urrent ratio for the same year+ Generally a qui$k ratio of (7( is $onsidered to represent
a satisfa$tory $urrent finan$ial situation4 but it does not imply a sound finan$ial position+
0t should be kept in mind that all debtors may not be liquid4 and $ash may be
immediately needed to pay operating e9penses+ Thus a $ompany with a high value of
qui$k ratio $an suffer from shortage of funds if it has slow paying4 doubtful and long
duration outstanding debtors+ @n other hand4 a $ompany with a low value of qui$k ratio
may really be operating with prosperity and paying its obligations in time if it has been
turning over its inventories effi$iently
6
8/9/2019 Final Project of Reliance Infra(2)
50/57
CAS9 RATI*
0t shows the relationship between absolute liquid or super qui$k $urrent assets and
liabilities+ 1bsolute liquid assets in$lude $ash4 bank balan$es4 and marketable
se$urities+ Sin$e $ash is the most liquid asset4 a finan$ial analyst may e9amine $ash
ratio and its equivalent to $urrent liabilities+ Trade investments or marketable se$urities
are equivalent of $ashK therefore4 they may be in$luded in the $omputation of $ash ratio+
;EARS 3551 3525 3522 3523 3527
CAS9RATI*
8 4 4 7 /4
27
8/9/2019 Final Project of Reliance Infra(2)
51/57
2009 2010 2011 2012 2013
0%
10%
20%
30%
40%
50%
60%
70%
Column3
InterpretationD
(% The situation of &''! is never re$ommended to have that mu$h $ash sitting idle with
the $ompany+ 0n the subsequent years the $ompany has put the $ash up to use by
investing it in different pro:e$ts thus maintaining a $ash ratio of )-P+
&% There is nothing to be worried about the la$k of $ash if the $ompany has reserve
borrowing power+ 0n 0ndia4 firms have $redit limits san$tioned from banks4 and $an easily
draw $ash+
IN:ENT*R; TURN*:ER RATI*
0nventory turnover is $al$ulated by dividing the $ost of goods sold by the average
inventory+ This ratio indi$ates the effi$ien$y of the firm in produ$ing and selling its
21
8/9/2019 Final Project of Reliance Infra(2)
52/57
produ$t4 by indi$ating the number of times the inventory has been $onverted into sales
during the period+
;EARS 3551 3525 3522 3523 3527
IN:ENT*R ;TURN*:ER
RATI*
2/.88 21./1 38.08 36.35 77.88
2009 2010 2011 2012 2013
0
5
10
15
20
25
30
35
Column3
InterpretationD
2
8/9/2019 Final Project of Reliance Infra(2)
53/57
8/9/2019 Final Project of Reliance Infra(2)
54/57
,et $redit sales $onsist of gross $redit sales minus sales return+
hen the information about $redit sales4 opening and $losing balan$es of trade debtors
is not available then the ratio $an be $al$ulated by dividing total sales by $losing
balan$es of trade debtors+
Debtors Turnover indi$ates the number of times debtors turnover ea$h year+ Generally4
the higher the value of debtors turnover4 the more effi$ient the management of the
$ompany+
;EARS 3551 3525 3522 3523 3527
E&T*R’STURN*:ER
RATI*25.58 4.47 0.5/ 8./2 3.46
2
8/9/2019 Final Project of Reliance Infra(2)
55/57
2009 2010 2011 2012 2013
0
2
4
6
8
10
12
Series 3
InterpretationD
(% 1s stated earlier4 the higher the value of debtors turnover4 the more effi$ient the
management of the $ompany+ But as it is evident from the graph that the ratio is dipping
with ea$h su$$essive year4 it serves as a sign of $aution for the management to look
after+
22
8/9/2019 Final Project of Reliance Infra(2)
56/57
C*NC)USI*NS
0n $on$lusion4 good management of working $apital is part of good finan$ial management+
5ffe$tive use of working $apital will add to the operational effi$ien$y of a departmentK
optimal use will help to generate ma9imum returns+
.atio analysis dis$ussed in the beginning4 $an be used to identify working $apital areas4
whi$h require $loser management+ >arious te$hniques and strategies4 dis$ussed above are
available for managing spe$ifi$ working $apital items+ Debtors4 $reditors4 $ash and in some
$ases inventories are the areas most likely to be relevant to a firm
23
8/9/2019 Final Project of Reliance Infra(2)
57/57
&I&)*GRAP9;
www+bseindia+$om
www+e$onomi$times+$om
www+finan$emaster+$om
www+money$ontrol+$om
www+gu:aratambu:a+$om
www+relian$einfra+$om
>inancial Management H I.M Pan%e'
RP R#=tagi’= Q >inancial Management
Tren%= in ,orking capital management it= impactB Pa%ac(i!355/"
Impact of ,orking capital management policie= on profita$ilit' of a firmS
:i=(nanai!3550"
An anal'=i= of ,orking capital management: Gane=(an!3550"
Effect= of ,orking capital management on SME profita$ilit'P? Gareia
Ter