Literature of working capital management

CHAPTER-1

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

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RELEVANCE OF STUDY

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

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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

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.

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LIMITATIONS OF THE STUDY:-

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.

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CHAPTER-2

COMPANY PROFILE

ORISSAPOWERTRANSMISSIONCORPORATIONLIMITED.(OPTCL)

Registered Office: Janpath, Bhubaneswar - 751022 Phone : (0674)- 2541320 /

2542320

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.

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

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.

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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:

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.

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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:

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

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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),

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

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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:

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

(FY98, FY99, FY00, FY01, FY02, FY03, FY04, FY05, FY06)

5) BSES took over management and operational control of 3 Distribution Companies

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(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

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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 Pass C.L., Pike R.H: “An overview of working capital management and corporate financing” (1984).2 Herzfeld B; “How to Understand Working Capital Management” (1990).3 Samiloglu F. and Demirgunes K., “The Effect of Working Capital Management on Firm

Profitability: Evidence from Turkey” (2008)

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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 Appuhami, Ranjith B A; “The Impact of Firms' Capital Expenditure on Working Capital

Management: An Empirical Study across Industries in Thailand”, (2008)5 Hardcastle; “Working Capital Management”,(2009).6 Thachappilly G. Working Capital Management Manages Flow of Funds”,(2009)

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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 Beneda, Nancy; Zhang, Yilei, “Working Capital Management, Growth and Performance of New

Public

Companies”, Credit & Financial Management Review, (2008)8 Dubey R, “Working Capital Management-an Effective Tool for Organisational Success” (2008)9 McClure B, Working Capital Works” (2007)

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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.

10 Gass D, “How To Improve Working Capital Management” (2006)11 Maynard E. Rafuse, “ Working capital management: an urgent need to refocus” Management

Decision, (1996)12 Thomas M. Krueger, “An Analysis of Working Capital Management Results Across Industries”

American Journal of Business, (2005)

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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,

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.

13 Eljelly; “ cash conversion cycle” year (2002.)14 Lazaridis and Tryfonidis, “ cash conversion cycle” year (2004)15 Raheman and Nasr;” variables of working capital management” year ( 2004).

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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,

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.

16

Garcia-Teruel and Martinez-Solano; ”working capital management of SMEs” year 1996.17 Falope and Ajilore: “utilisation of resources” year 2003

18 ) Kouma Guy, (2001)“Working capital management in healthcare” [email protected] Volume 5; page No 76-89

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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

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.

19 Mehmet SEN, Eda ORUC (2005) “Relationship between the efficiency of working capital management and company size”, [email protected] Volume 2; Pages No 32-42

20 Brealey, R., (1997) “Working capital management Working Capital management concepts work sheet university of phoenix”. Volume 1; Pages No 123-128

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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

[18]

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. 2006-2007

2. Annual report of OPTCL 2007-2008



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.

[19]

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

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

[20]

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

converted into sales.

DEBTORS TURNOVER RATIO= SALES/ AVERAGE ACCOUNT RECEIVABLES.

AVERAGE A/C RECEIVABLES= opening trade debtor+ Closing trade debtor/2

AVERAGE COLLECTION PERIOD= (365/DTR) days

Or RECEIVABLES * 365/ sale

B) WORKING CAPITAL TURNOVER RATIO: It signifies that for an amount of

sales, a relative amount of working capital is needed. If any increase in sales

contemplated working capital should be adequate and thus this ratio helps management

[21]

to maintain the adequate level of working capital. The ratio measures the efficiency with

which the working capital is being used by a firm. It may thus compute net working

capital turnover by dividing sales by net working capital.

WORKING CAPITALTURNOVER RATIO=cost of sales/ net working capital

CURRENT ASSET TURNOVER RATIO:

CURRENT ASSET TURNOVER RATIO= sales / current asset

STATISTICAL TOOLS USED FOR DATA ANAYLSIS:

The various statistical tools used for data analysis is as follows:

a) Tables:

b) Bar-chart

c) Graphs

d) Correlation

ANALYTICAL TOOLS USED:

The analytical tools used for data analysis is as follows:

a) Ratio analysis

b) Schedule of change in working capital

c) Cash flow statements

CHAPTER-5

RESULTS AND FINDINGS

[22]

The result and discussion of the study is presented in five different sections. The first

sections explain about the various components of working capital, variable of working

capital. The second section explains about the liquidity trend of the organization. The

third section explains about the working capital trend .The fourth section explains the

utilization of current assets and current liabilities. The fifth section explains the measure

to effective management of working capital.

The first section explains about the various components of working capital and variables

of working capital. The components of working capital are presented in Table 5.1.

(TABLE 5.1: COMPONENTS OF WORKING CAPITAL)

Table 1.1 2006-

2007(rs)

2007-2008(Rs) 2008-2009(Rs) 2009-2010(Rs)

Cash 648,276,812 490,881,183 907,019,750 727,106,129

Debtors 798196201 1,05,24,79,982 1,05,50,97,473 1,05,56,31,698

Inventories 751064690 76,68,65,262 80,85,19,278 96,90,56,460

sundry

Creditors

61,03,22,496 66,51,67,980 68,95,26,597 72,40,51,456

Provisions 83,08,65,819 1,30,45,17,744 4,81,70,02,603 5,69,56,67,475

An insight into the table reveals that:

a) Cash and bank balances in 2006-2007 were Rs 648276812. It is decreased to Rs

490,881183. With a-24.27% growth. In 2008-2009 it increased to Rs 907,019,750. And

then it suddenly decreased to Rs 727,106,129.

b) Debtors increases which was not a good sign. In 2006-2007 debtors were Rs

79,81,96,201 and it increased Rs 105,24,79,982 a total increase in Rs 254283781. In

2008-2009 it was Rs 1,05,50,97,473. And in 2009-2010 it again increased to Rs

1,05,56,31,698.

c) Inventories were increased at a good speed. The inventories were Rs 79,81,96,201 in

2006-2007. In 2007-2008 it increased to Rs 76,68,65,262, ultimately increase in Rs

15800572, with the percentage growth 2.10%. In 2008-2009 it increased to Rs

[23]

80,85,19,278 with the increase in 7.7% . in 2009-2010 it again increased to

96,90,56,460 with a increase in 29%.

d) Sundry creditors also increased a lot. In 2006-2007 it was Rs 61, 03, 22,496. Then it

increased by Rs 5,4 8,45,484 which ultimately amounted to Rs 66,51,67,980 with a

increase of 8.99%. in the year 2007-2008. In 2008-2009 it increased to Rs 68,95,26,597

with a percentage increase of 12.98%. in 2009-2010 it again increase to Rs

72,40,51,456.

e) Provisions also increased throughout this 4years. In 2006-2007 it was

Rs83,08,65,819. Then it increased to Rs 1,30,45,17,744 with a percentage increase of

57%. In 2008-2009 it again increased to Rs4,81,70,02,603 with a percentage increase in

479%. In 2009-2010 it again increased to Rs 5,69,56,67,475.

(Table 5.2: Variables of Working Capital Management)

VARIABLES YEARS

2006-2007 2007-2008 2008-2009 2009-2010

ROTA (Return on Total Assets)

0.15 0.16 0.22 0.10

OPM (operating profit margin)

61.55% 56.40% 27.78% 34.65%

GEAR (Gearing Ratio i.e. financial debt / total assets)

0.64:1 0.55:1 0.43:1 0.33:1

CR (Current Ratio) 1.28:1 0.94:1 0.86:1 0.62:1

QAR (Quick Assets Ratio)

0.58:1 0.46:1 0.27:1 0.22

CA/TA (Current Assets to Total Assets)

0.13 0.12 0.21 0.16

CL/TA (Current Liabilities to Total Assets)

0.11 0.13 0.24 0.26

[24]

SK/CA (Stocks to Current Assets)

0.23 0.25 0.13 0.19

TD/CA (Trade Debtors to Current Assets)

0.25 0.34 0.17 0.21

CA_TURN (Current Assets Turnover is Sales/Current Assets)

1.10 1.29 1.08 0.60

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 0.15 in 2006-2007, 0.16 in 2007-2008, 0.22 in 2008-2009

and 0.10 in 2009-2010.

B) Operating profit margin was 61.55% in 2006-2007 then it reduced to 56.40%,

27.78%, and 34.65% in 2007-2008, 2008-2009, and 2009-2010 respectively. Anything

between 65% to 85% is known as a good operating margin. And for OPTCL is a sign of

alarm.

C) Gearing ratio came 0.64:1 in 2006-2007 and in 2007-2008 it is 0.55:1 and 0.43:1 and

0.33:1 in 2008-2009 and 2009-2010.

D) Current ratio generally reduced for the organisation, in 2006-2007 it was 1:28 and it

reduced to 0.94:1 in 2007-2008 and then it again reduced to to0.86:1 and 0.62 in 2008-

2009 and 2009-2010 respectively.

E) Quick asset ratio in 2006-2007 as it was 0.58:1, in 2007-2008 it became 0.46:1 and

in 2008-2009 and in 2009-2010 it became 0.27:1 and 0.22:1.

F) Current asset to total asset ratio came 0.13, 0.12, 0.21 and 0.16 in the year 2006-

2007, 2007-2008, 2008-2009, and 2009-2010.

G) Current liability to total asset ratio came 0.11 in 2006-2007, in 2007-2008 it came

0.13, and in 2008-2009 and 2009-2010 it came 0.24:1 and 0.26:1 respectively.

H) Stock to current asset is 0.23, 0.25, 0.13, and 0.19 in respective years.

[25]

I) Trade debtors in 2006-2007 is 0.25, in 2007-2008 is 0.34, in 2008-2009 is 0.17 and in

2009-2010 is 0.21.

J) Current asset turnover is 1.10 in 2006-2007, 1.29 in 2007-2008, 1.08 in 2008-2009

and become 0.60 in 2009-2010

Table 5.3: Components of Current ratio, quick ratio and Absolute Liquid Ratios

2006-2007 2007-2008 2008-2009 2009-2010

Current ratio1.28:1 0.94:1 0.86:1 0.62:1

Quick ratio 0.58:1 0.46:1 0.27:1 0.22

Absolute liquid ratio

0.25:1 0.15:1 0.12:1 0.08:1

SK/CA 0.23 0.25 0.13 0.19

TD/CA 0.25 0.34 0.17 0.21

CA/TA 0.13 0.12 0.21 0.16

CL/TA 0.11 0.13 0.24 0.26

CCC( cash conversion cycle)

Inventory days 77 days 70 days 43 days 115days

Debtor turnover days

125days 85days 57days 126days

Creditors turnover days

63 days 61days 37 days 86days

Table-5.3 revels the components of current ratio, quick ratio and absolute quick ratio. From the table following things can be derived:

[26]

a) In 2006-2007 it is found that the current ratio is 1.28:1 which is just below the

standard of 2:1. In 2007-2008, it is found that the current ratio of OPTCL is 10.94:1. 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. The cash and bank balance is

found to be decreased this year in comparison to that of previous year where as the

current liabilities and provisions both have increased this year. In 2008-2009, it is found

that the current ratio of OPTCL is 0.86:1. . It is a not good indication according to the

rule of thumb. Because the firm has more current liabilities than current assets. The firm

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.

b) Quick ratio in 2006-2007 it was 0.58:1 and 0.46:1, 0.27:1 and 0.22:1 in 2007-2008, 2008-

2009, and 2009-2010 respectively.

c) In the year 2006-2007 the Absolute Liquid Ratio is found to be 0.25:1. In the year

2007-2008 the Absolute Liquid Ratio of OPTCL is found to be 0.15:1. 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.

d) Stock to current asset is 0.23, 0.25, 0.13, and 0.19 in respective years.

e) Trade debtor to current asset ratio come 0.25, 0.34, 0.17 and 0.21 respectively.

f) Current asset to total asset ratio came 0.13, 0.12, 0.21 and 0.16 in the year 2006-2007,

2007-2008, 2008-2009, and 2009-2010.

Current liabilities to total asset came 0.11 in 2006-2007 and in 2007-2008 it came 0.13 ,

in 2008-2009 it came 0.24:1 and in 2009-2010 it came 0.26:1.

h) Cash conversion ratio for inventory came 77days, 70 days, 43 days and 115 days.

[27]

Cash conversion for debtor comes 125 days in 2006-2007, and it reduced to 85 and 57

days in 2007-2008, 2008-2009 respectively. But in 2009-2010 it increases to 126 days.

Cash conversion ratio came 63days, 61days, 37days and 86days respectively.

[28]

THE SECOND SECTION EXPLAINS ABOUT THE LIQUIDITY TREND OF THE ORGANIZATION.

LIQUIDITY RATIO

CURRENT RATIO

Table5.4CURRENT RATIO- (CURRENT ASSETS/CURRENT LIABILITY)

YEAR CURRENT ASSET(IN RUPEES)

CURRENT LIABILITY(IN RUPEES)

RATIO

2006-2007 3,21,50,26,429 2,50,80,12,516 1.28:1

2007-2008 3,10,61,19,303 3,35,96,86,508 0.94:1

2008-2009 6,30,63,13,319 7,29,34,88,649 0.86:1

2009-2010 5,07,93,75,378 8,21,36,64,274 0.62:1

2006-2007 2007-2008 2008-2009 2009-20100

0.2

0.4

0.6

0.8

1

1.2

1.4

1.28

0.940000000000001 0.86000000000000

1

0.620000000000008

CURRENT RATIO

RATI

O

From the table 5.4 and diagram of Current Ratios of different financial years of OPTCL,

various results can be made.

[29]

A) 2006-2007 it was found that the current ratio was 1.28:1 which is below the standard

of 2:1. It is due to a decrease of total current assets from the previous year to current

year. Still it is manageable and also the condition was under the control.

B) In 2007-2008, it was found that the current ratio of OPTCL was 0.94:1. It was below

the standard of 2:1 and it is decrease in total current assets from previous year and an

increase in current liability this year. The cash and bank balance is found to be

decreased this year in comparison to that of previous year where as the current liabilities

and provisions both have increased this year.

C) In 2008-2009, it was found that the current ratio of OPTCL was 0.86:1. . It is a not

good indication according to the rule of thumb. Because the firm has more current

assets than current liabilities. The firm may be able to meet its short term obligations in

time.

D) In 2009-2010, it was found that the current ratio of OPTCL was 0.62:1. It was not a

good indication according to rule of thumb. Because the firm has more current assets

than current liabilities. The firm was not able to meet its short term obligation in time.

E) Because of increase in administrative overhead expenses, super annuity benefits and

payment of past loan etc. are the major factor for increasing of current liabilities.

F) Situation can be controlled. So more emphasis can be given on these areas to reduce

current liabilities and to increase current assets so that the actual standard of 2:1 can be

achieved.

In addition to, company should make clear cut strategic planning to sell electricity to

major industries at industrial rate to achieve higher revenue

TABLE5.5 Quick Ratio - (Liquid Asset/ Current Liability)

YEAR LIQUID ASSET CURRENT LIABILITY RATIO

2006-2007 1,44,64,73,013 2,50,80,12,516 0.58:1

2007-2008 1,54,33,61,165 3,35,96,86,508 0.46:1

2008-2009 1,96,21,17,223 7,29,34,88,649 0.27:1

2009-2010 1,78,27,37,827 8,21,36,64,274 0.22:1

[30]

2006-2007 2007-2008 2008-2009 2009-20100

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.58

0.46

0.270.22

QUICK RATIO

YEARS

RATI

O

FROM THE TABLE 2.2 FOLLOWING THINGS ARE DERIVED:

A) The Quick Ratio or the Acid Test Ratio of OPTCL for the financial year 2006-2007

was found to be 0.58:1 and the normal standard for is 1:1. So it is a manageable

situation.

B) In the year 2007-2008 it was found that the Quick Ratio of OPTCL was 0.46:1 which

was below the normal standard. It was due to a little bit increase in current liabilities in

comparison to that of previous year. Still it was also in a manageable position and by

giving a small effort the normal standard of 1:1 can be achieved.

C) In the year 2008-2009 it Is found that the QUICK ratio of OPTCL IS 0.27:1, which

is just normal standard. It is due to a little bit increase in current liabilities.

D) In the year 2009-2010 it is found that the Quick ratio was 0.22:1. Which is below

standard of 1:1? Management should have an eye on to that.

[31]

TABLE 5.6

ABSOLUTE LIQUID RATIO- (ABSOLUTE LIQUID ASSET/CURRENT LIABILITY):

YEAR Absolute Liquid Asset Current Liability Ratio

2006-2007 64,82,76,812 2,50,80,12,516 0.25:1

2007-2008 49,08,81,183 3,35,96,86,508 0.15:1

2008-2009 90,70,19,750 7,29,34,88,649 0.12:1

2009-2010 72,71,06,129 8,21,36,64,274 0.08:1

2006-20072007-2008

2008-20092009-2010

0

0.05

0.1

0.15

0.2

0.25

0.25

0.15

0.12

0.08

ABSOLUTE LIQUID RATIO

year

ratio

By going through the table 5.6 & diagram of Absolute Liquid Ratio, balance sheet of

OPTCL the following results can be drawn.

A) In the year 2006-2007 the Absolute Liquid Ratio was found to be 0.25:1. Though it

is below the normal standard still it is in a manageable condition.

[32]

B) In the year 2007-2008 the Absolute Liquid Ratio of OPTCL was found to be 0.15:1

which is below from the previous year. It is due to a decrease in cash and bank balances

and also a slightly increase in Current Liabilities.

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.

D) In the year 2009-2010, the absolute liquid ratio found to be 0.08:1. This is due to less

cash and bank balances of the organization in comparison to the Current liabilities.

(Table 5.7)

CASH FLOW STATEMENTS

(2009-2010) (2008-2009) (2007-2008) amount in (Rs) amount in (Rs) amount in (Rs)

profit/loss before tax & extraordinary items -71,37,17,644 -18,30,29,883 -3,64,99,383adjustment for:

appropriation to reserves and surpluses 1,18,36,39,044 6,33,87,383 11,15,56,818interest and finance charges 54,16,01,198 97,24,54,617 1,10,65,54,318

Depreciation 1,08,22,03,592 1,09,74,37,879 1,09,90,58,990preliminary expenses W/O 30,26,423 30,26,423 30,26,423

excess provision written back -1,04,00,87,510 -47,574 -209interest income -4,55,13,310 -6,90,09,008 -5,03,60,383

provisions for wealth tax 27,846 46,318 46,305provision/write off against theft materials 15,22,603 29,50,312 28,65,292

provisions for obsolete stock-store etc 1,11,96,801bad and doubtful debt 4,47,68,652 11,63,525 92,89,278

provisions for fringe benefit tax -------------------- -23,96,915 -21,13,256OPERATING PROFIT BEFORE

WORKING CAPITAL CHANGE (A) 1,05,74,70,893 1,88,59,83,078 2,25,46,20,994

WORKING CAPITAL CHANGEstores and spares -16,20,59,785 -4,46,04,328 -2,98,62,664sundry debtors -4,53,02,877 -37,81,016 -26,35,73,059

other current assets -59,43,581 -1,43,98,325 -2,44,71,317loan and advances 1,20,34,71,087 -2,72,53,85,618 24,60,67,167current liabilities 4,93,59,037 42,88,03,928 42,01,27,401

Provisions 1,91,87,52,382 3,52,31,00,656 47,36,52,134NET WORKING CAPITAL CHANGES

(B)2,95,82,76,263 1,16,37,35,296 82,19,39,662

CASH GENERATED FROM THE OPERATION (A)+(B)

4,01,57,47,156 3,04,97,18,374 3,07,65,60,656

[33]

CASH FLOW FROM INVESTING ACTIVITIES:

capital expenditure (CAPEX) -93,41,57,641 -91,68,37,432 -1,03,91,08,694Interest received revenue 4,55,13,310 6,90,09,008 5,03,60,383

CASH GENERATED FROM INVESTING ACTIVITIES ( C )

-88,86,44,331 -84,78,28,424 -98,87,48,311

CASH FLOW FROM FINANCING ACTIVITIES:

proceeds from secured loan -1,06,41,24,474 -1,05,96,33,683 -1,02,66,95,328proceeds from unsecured loan 32,39,10,165 -6,95,82,948 -36,86,01,393

interest paid -2,61,68,02,137 -88,70,89,752 -83,19,11,252proceed from share capital 5,00,00,000 23,05,55,000 -----------------

CASH FLOW FROM FINANCING ACTIVITIES (D)

-3,30,70,16,446 -1,78,57,51,383 -2,24,52,07,973

NET CASH GENERATED FROM ALL ACIVITIES (A+B+C+D)

-17,99,13,621 41,61,38,567 -15,73,95,628

Cash and cash equivalent at the beginning of the year

90,70,19,750 49,08,81,183 64,82,76,812

cash equivalent at the end of the period 72,71,06,129 90,70,19,750 49,08,81,184

Table 5.7 defines the following:

a) Cash generated from investing activities, Rs-88,86,44,331 , Rs-84,78,28,424 and

Rs-98, 87, 48,311 in the year 2009-2010, 2008-2009 and 2007-2008 respectively.

b)Hence, there is a generation of Rs.4,01,57,47,156 cash flow from its operating

activities for the year 2009-2010, where as in 2008-2009, it was Rs.3,04,97,18,374. And

in 2007-2008 it was 3,07,65,60,656.

c) The net cash flow of Rs-3,307,016,446 from financing activities in 2009-10. where it

was -1,78,57,51,383 and -2,24,52,07,973 in 2008-2009 and 2008-2007 respectively.

d)That, the net cash flow from its operating, investing and financing activities for the

year 2009-2010 is a negative figure of Rs.-17,99,13,621. It became positive in the year

2008-2009, which was Rs 41, 61, 38,567. And in 2007-2008 it becameRs-1573, 95,628.

The third section explains about the working capital trend

Table-5.8

Size of Working Capital:

[34]

(Amount. In Rs.)

CURRENT ASSETS(CA) 2007(rupees) 2008(rupees) 2009(rupees) 2010(rupees)

Stores and spares 751064690 76,68,65,262 80,85,19,278 96,90,56,460

Sundry debtors 798196201 1,05,24,79,982 1,05,50,97,473 1,05,56,31,698

Cash and bank balances 648276812 49,08,81,183 90,70,19,750 72,71,06,129

Other current assets 628081987 65,25,53,304 66,69,51,629 74,48,94,758

Loan and advances 389406739 14,33,39,572 2,86,87,25,189 1,58,26,86,333

Total 3,21,50,26,429 3,10,61,19,303 6,30,63,13,319 5,07,93,75,378

Less: CURRENT LIABILITIES(CL)

2007(rupees) 2008(rupees) 2009(rupees) 2010(rupees)

Sundry creditors 61,03,22,496 66,51,67,980 68,95,26,597 72,40,51,456

Deposits and retention from suppliers/contractors

12,50,63,350 13,71,54,497 14,91,29,269 12,89,91,075

Interest accrued but not due on loans

6,27,33,789 2,05,82,149 1,30,49,185 51,73,055

Liabilities for wealth tax 37,299 47,240 47,253 28,781

Electricity duty payable 2,12,903 49,092 1,82,269 1,56,113

Liabilities for fringe benefit tax

23,41,534 44,54,790 68,51,705 68,51,705

Other liabilities 87,64,35,326 1,22,77,13,016 1,61,76,99,768 1,65,27,44,614

Total 1,67,71,46,697 2,05,51,68,764 2,47,64,86,046 2,51,79,96,799

Provisions 83,08,65,819 1,30,45,17,744 4,81,70,02,603 5,69,56,67,475

Total 2,50,80,12,516 3,35,96,86,508 7,29,34,88,649 8,21,36,64,274

working capital( CA-CL) 70,70,13,913 -25,35,67,205 -98,71,75,330 -3,13,42,88,896

From the table -5.8 following things are derived:

In 2006-2007, working capital was Rs70,70,13,913 because current asset was more than

current liabilities. In 2007-2008 working was became negative due to the fact that

current liabilities exceeds current assets. In 2008-2009 it became Rs -98,71,75,330 due

to excessive of provisions. In that year current liabilities exceeds current assets. In

2009-2010, working capital again became negative.

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.

[35]

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 2006-2007 2007-2008 2008-09 2009-10

Net W.C (A-B) 70,70,13,913 25,35,67,205 -98,71,75,330 -3,13,42,88,896

W.C. Indices 100 35.86 -139.62 -443.31

2006-2007 2007-2008 2008-2009 2009-2010

-500

-400

-300

-200

-100

0

100

200

WORKING CAPITAL TREND

Axis Title

From the table 5.9 followings things are derived: It is observed that in 2006-2007, working capital indices was very high due to current assets exceeded current liabilities. In 2007-2008indices was also high because current asset were more than current liabilities. In 2007-2008 the company was able to manage their working capital efficiently. But in 2008-2009 and 2009-2010 it became negative. Here in the year 2008-2009 and 2009-2010 current liabilities exceeded current assets.

TABLE-5.10

[36]

(Amount. In Rs.)

WORKING CAPITAL TURN OVER RATIO- (SALES/NET WORKING CAPITAL)

Working capital turnover ratio

YEAR Cost of Sales Net working capital Ratio

2007 3553494401 707013913 5.03times

2008 3997558798 -25,35,67,205 -15.7times

2009 6789295427 -98,71,75,330 -6.88times

2010 3051627568 -3,13,42,88,896 -0.97 times

2006-2007 2007-2008 2008-2009 2009-2010

-20

-15

-10

-5

0

5

10

5.03

-15.7

-6.88

-0.97000000000000

1

WORKING CAPITAL TURNOVER RATIO

YEARS

ratio

From the table 5.10 following things derived:

A) In the year 2006-2007, there was an increased in working capital turnover ratio to

5.03.

B) However, in the year 2007-2008, it was -15.7 which indicates there was a decrease in

net current assets due to increase in current liabilities.

C) In the year 2008-2009, it was -6.88 which is better than the previous year.

D) 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.

TABLE 5.11

[37]

STATEMENT SHOWING CHANGES IN WORKING CAPITAL(2007 and 2008)

(2006-2007)(Rs)

(20072008)(Rs)

Increase in working capital

(Rs)

Decrease in working capital

(Rs)

Current assetsStores and spares 751064690 766865262 15800572 -Sundry debtors 798196201 1052479982 254283781 -Cash & bank

balances648276812 490881183 - 157395629

Other current assets 628081987 652553304 24471317 -

Loans & advances 389406739 143339572 - 246067167Total 3215026429 3106119303

Current liabilities

Current liabilities 1677146697 2055168764 - 378022067Provisions 830865819 1304517744 - 473651925

Total 2508012516 3359686508

960581118

Working capital(currentassets-

current liabilities)

707013913 -253567205

Net decrease in working capital

-960581118

-253567205 -253567205 1255136788 1255136788

From the table 5.11 following things are derived:

By going through the statement showing changes in working capital the following

results can be made.

A) that, the total current asset of the year 2007-2008 is decreased to Rs. 3,10,61,19,303

from a previous year’s figure of Rs. 3215026429.

B) The total value of stores and spare is increased from the previous year’s figure and

the value of sundry debtors is also increased from the previous year’s figure.

[38]

C) The cash and bank balances of the organization have a decrease of Rs. 157395629

from the previous year’s figure. Similarly the figure for loans and advances is also

decreased to Rs. 143339572 from the previous year’s figure of Rs. 389406739.

D) The other current assets like prepaid expenses and sundry receivables have also

increased from the previous year’s figure.

E) The total current liabilities of the year 2007-2008 are increased to Rs.3359686508

from a previous year’s figure of Rs.2508012516.

F)That, the increase for current liabilities is due to increase in the figure of sundry

creditors, deposits and retention from suppliers/contractors, liabilities for wealth tax,

liabilities for fringe benefit tax and other liabilities from the previous year’s figure.

G) Due to increase in the value of stores and spares, sundry debtors, and other current

assets, there is a sign of increase in working capital. However, due to a decrease in the

figure of cash, bank balances, loan and advances etc, there is a clear sign of decrease in

the working capital.

H) Due to increase in current liabilities and provisions for pension and gratuity and

retrospective revision of pay, there is a sign of decrease in working capital.

I)As per the analysis, it is observed that, the ratio of increase of working capital is

drastically reduced than the previous year’s and the decrease sign of working capital is

Rs.960581118(2007-2008), which has impacted the steady increase of current working

capital & negatively affected the profitability of the organization.

J) It is found that the current asset’s figure is decreased from the previous year’s figure

& the current liabilities figure is increased from the previous year. As a result of which,

there is a net decrease (negative figure) in working capital this financial year (2007-

2008).

K) That, some more emphasis can be given on current assets to increase its figure and to

decrease current liabilities’ figure as a result of which the figure for working capital can

be increased.

TABLE-5.12

STATEMENT SHOWING CHANGES IN WORKING CAPITAL

[39]

( 2009 TO 2010)

(2008-2009)(Rs)

(2009-2010)(Rs)

Increase in working capital

(Rs)

Decrease in working capital

(Rs)Current assets

Stores and spares 808,519,278 96,90,56,460 160537182 -Sundry debtors 1,055,097,473 1,05,56,31,698 534225 -Cash & bank

balances907,019,750 72,71,06,129 179913621

Other current assets

66,69,51,629 74,48,94,758 77943129 -

Loans & advances 2,86,87,25,189 1,58,26,86,333 - 1,28,60,38,856Total 6,30,63,13,319 5,07,93,75,378

Current liabilities

Current liabilities 2,47,64,86,046 2,51,79,96,799 - 4,15,10,753Provisions 4,81,70,02,603 5,69,56,67,475 - 87,86,64,872

Total 7,29,34,88,649 8,21,36,64,274

2147113566

Working capital(current assets-

current liabilities)

-98,71,75,330 -3,13,42,88,896

Net decrease in working capital

-2147113566

-3,13,42,88,896 -3,13,42,88,896 2386128102 2386128102By going through the table5.12 showing changes in working capital the following

results can be made:

a) That, the total current asset of the year 2009-2010 is decreased to Rs. 5,07,93,75,378

From a previous year’s figure of Rs. 6,30,63,13,319 .

b) The total value of stores and spare is increased from the previous year’s figure and

the value of sundry debtors is also increased from the previous year’s figure.

c) The cash and bank balances of the organization have a decrease of

Rs.17,99,13,621from the previous year’s figure. Similarly the figure for loans and

advances is also decreased to Rs.1,58,26,86,333 from the previous year’s figure of Rs.

2,86,87,25,189.

[40]

d) The other current assets like prepaid expenses and sundry receivables have also

increased from the previous year’s figure.

e) The total current liabilities of the year 2009-2010 are increased to Rs8, 21,36,64,274

From a previous year’s figure of Rs. 7,29,34,88,649.

f)That, the increase for current liabilities is due to increase in the figure of sundry

creditors, deposits and retention from suppliers/contractors, liabilities for wealth tax,

liabilities for fringe benefit tax and other liabilities from the previous year’s figure.

g)Due to increase in the value of stores and spares, sundry debtors, and other current

assets, there is a sign of increase in working capital. However, due to a decrease in the

figure of cash, bank balances, loan and advances etc, there is a clear sign of decrease in

the working capital.

h)Due to increase in current liabilities and provisions for pension and gratuity of pay,

there is a sign of decrease in working capital.

i)As per the analysis, it is observed that, the ratio of increase of working capital is

drastically reduced than the previous year’s and the decrease sign of working capital is

Rs. -2147113566 (2009-2010), which has impacted the steady increase of current

working capital & negatively affected the profitability of the organization.

j)It is found that the current asset’s figure is decreased from the previous year’s figure &

the current liabilities figure is increased from the previous year. As a result of which,

there is a net decrease (negative figure) in working capital this financial year (2009-

2010).

k)That, some more emphasis can be given on current assets to increase its figure and to

decrease current liabilities’ figure as a result of which the figure for working capital can

be increased.

SECTION-4 EXPLAINS ABOUT CURRENT ASSETS AND CURRENT LIABILITIES

CURRENT ASSETS

[41]

Total assets are basically classified in two parts as fixed assets and current assets. Fixed

assets are in the nature of long term or life time for the organization. Current assets

convert in the cash in the period of one year. It means that current assets are liquid

assets or assets which can convert in to cash within a year.

TABLE 5.13

CURRENT ASSETS SIZE

Current assets(CA) 2007(rupees) 2008(rupees) 2009(rupees) 2010(rupees)

Stores and spares 751064690 76,68,65,262 80,85,19,278 96,90,56,460

Sundry debtors 798196201 1,05,24,79,982

1,05,50,97,473 1,05,56,31,698

Cash and bank balances

648276812 49,08,81,183 90,70,19,750 72,71,06,129

Other current assets 628081987 65,25,53,304 66,69,51,629 74,48,94,758

Loan and advances 389406739 14,33,39,572 2,86,87,25,189 1,58,26,86,333

Total of CA 3,21,50,26,429 3,10,61,19,303

6,30,63,13,319 5,07,93,75,378

CA indices 100 99.61 196.15 157.99

2006-2007 2007-2008 2008-2009 2009-20100

50

100

150

200

250

100 99.61

196.15

157.99

CURRENT ASSET INDICES

indices

[42]

(Amnt. In Rs.)

From the table-5.13 followings things are derived: The current asset indices show

growth in the year 2006-2007. In 2007-2008 it declines marginally and in 2008-2009 it

again increase and in 2009-2010 it declines.

TABLE-5.14

CURRENT ASSET TURNOVER RATIO - (sales/current Assets)

YEAR SALES CURRENT ASSETS RATIO

2007 3,55,34,94,401 3,21,50,26,429 1.10

2008 3,99,75,58,798 3,10,61,19,303 0 1.29

2009 6,78,92,95,427 6,30,63,13,319 1.08

2010 3,05,16,27,568 5,07,93,75,378 0.60

2006-2007 2007-2008 2008-2009 2009-20100

0.2

0.4

0.6

0.8

1

1.2

1.4

1.1

1.29

1.08

0.600000000000001

CURRENT ASSET TURNOVER RATIO

YEAR

RA

TIO

From the table 5.14 following things are derived: In the year 2006-2007, the current

asset turnover was 1.10 which became 1.29, 1.08, and 0.60 in the year 2007-2008,

[43]

2008-2009 respectively. But in the year 2009-2010, the current asset turnover was 0.60

due to sale was less than the current assets.

COMPONENTS OF CURRENT ASSETS

Analysis of current assets components enable one to examine in which components the

working capital fund has locked. A large tie up of funds in inventories affects the

profitability of the business or the major portion of current assets is made up cash alone,

the profitability will be decreased because cash is non earning assets.

TABLE 5.15 (No. in %)

Current assets(CA) 2007 2008 2009 2010

Stores and spares 23.37 24.69 12.82 19.08

Sundry debtors 24.82 33.89 16.73 20.78

Cash and bank balances 20.16 15.80 14.38 14.31

Other current assets 19.54 21.01 10.58 14.67

Loan and advances 12.11 4.61 45.49 31.16

Total of CA 100 100 100 100

2006-2007 2007-2008 2008-2009 2009-20100

5

10

15

20

25

30

35

40

45

50

stores and spares

sundry debtors

cash and bank

other current assets

loans and advances

year

percentage

2007(rupees) 2008(rupees) 2009(rupees) 2010(rupees)

Sundry creditors 61,03,22,496 66,51,67,980 68,95,26,597 72,40,51,456

Deposits and retention from 12,50,63,350 13,71,54,497 14,91,29,269 12,89,91,075

[44]

suppliers/contractors

Interest accrued but not due on loans

6,27,33,789 2,05,82,149 1,30,49,185 51,73,055

Liabilities for wealth tax 37,299 47,240 47,253 28,781

Electricity duty payable 2,12,903 49,092 1,82,269 1,56,113

Liabilities for fringe benefit tax 23,41,534 44,54,790 68,51,705 68,51,705

Other liabilities 87,64,35,326 1,22,77,13,016 1,61,76,99,768 1,65,27,44,614

Total 1,67,71,46,697 2,05,51,68,764 2,47,64,86,046 2,51,79,96,799

Provisions 83,08,65,819 1,30,45,17,744 4,81,70,02,603 5,69,56,67,475

Total 2,50,80,12,516 3,35,96,86,508 7,29,34,88,649 8,21,36,64,274

Current liabilities indices 100 133.96 290.81 327.50

CURRENT LIABILITIES:-

TABLE 5.16

TABLE 5.17

CURRENT LIABILITIES SIZE

2006-2007 2007-2008 2008-2009 2009-20100

50

100

150

200

250

300

350

100133.96

290.81327.5

CURRENT LIABILITIES

current liabilities

years

indi

ces

From the table 5.17 following things are derived: The current liabilities graph shows

a rapid growth. In 2006-2007 ,the current asset indices is 100 and thereafter it increases

[45]

to 133.96, 290.81, 327.5 in 2007-2008, 2008-2009, 2009-2010 respectively. The

current liabilities increased at a speed.

(TABLE 5.18)

DEBTOR TURN OVER RATIO- (NET SALES/AVERAGE DEBTORS)

YEAR Net Sales Average Debtors Ratio Average Collection

Period

(365/DTR)days

2007 3,55,34,94,401 1216845410 2.92 125

2008 3,99,75,58,798 925338091.5 4.32 85

2009 6,78,92,95,427 1,05,37,88,728 6.44 57

2010 3,05,16,27,568 1,05,53,64,586 2.89 126

2006-2007 2007-2008 2008-2009 2009-20100

1

2

3

4

5

6

7

2.92

4.32

6.44

2.89

DEBTOR TURN OVER RATIO

years

ratio

[46]

2006-2007 2007-2008 2008-2009 2009-20100

20

40

60

80

100

120

140125

85

57

126AVERAGE COLLECTION PERIOD

YEARS

DAYS

Debtor Turn Over Ratio- By going through our calculation table and diagrams of

Debtor Turn over Ratio, profit and loss accounts and balance sheets of OPTCL the

following results can be drawn.

A) In the year 2006-2007 the debtor turnover ratio is 2.92 times and the average

collection period is found to be 125 days. This year, there is a higher value of debtor

turn over and a shorter average collection period in comparison to that of previous year.

This is a good indication.

B) In the year 2007-2008 the debtor’s turnover ratio is 4.32 times and the average

collection period is 85 days. This year, the value of debtor’s turnover is higher than the

previous year due to decrease in average debtors and an increase in net sales. And the

average collection period is also shorter than the previous year’s figure.

C) In the year 2008-2009 the debtor turnover ratio is 6.44 times and the average

collection period is 57 days. This year, the value of debtor turnover is higher than the

previous year due to decrease in average debtor.

D) In the year 2009-2010 the debtor turnover is 2.89 times and the average collection

period is found to be 126 days. This year, there is higher value of debtor turn over.

E) OPTCL used to collect pending dues directly from consumers for which, substantial

delay in getting payment was . However, the present average period of collection is

decreased due to involvement of NESCO, SOUTHCO, CESCO, WESCO etc. for

collection of revenue on behalf of OPTCL and the same has been made through banks.

[47]

The shorter the average collection period, the better the quality of debtors, since a short

collection period implies the prompt payments by debtors. So this is a good indication

for the organization.

Section five generally defines Measures to Improve Working Capital Management

at OPTCL: The essence of effective working capital management is proper cash flow

forecasting. This should take into account the impact of unforeseen events, market

cycles, loss of a prime customer and actions by competitors. So the effect of unforeseen

demands of working capital should be factored by company. This was one of its reasons

for the variation of its revised working capital projection from the earlier projection.

a) It pays to have contingency plans to tide over unexpected events. While market-

leaders can manage uncertainty better, even other companies must have risk-

management procedures. These must be based on objective and realistic view of the role

of working capital.

b) Addressing the issue of working capital on a corporate-wide basis has certain

advantages. Cash generated at one location can well be utilized at another.

c) An innovative approach, combining operational and financial skills and an all-

encompassing view of the company’s operations will help in identifying and

implementing strategies that generate short-term cash. This can be achieved by having

the right set of executives who are responsible for setting targets and performance

levels. They could be then held accountable for delivering, encouraged to be

enterprising and to act as change agents.

d) Working capital management is an important yardstick to measure a company

operational and financial efficiency. This aspect must form part of the strategic and

operational thinking. Efforts should constantly be made to improve the working capital

position. This will yield greater efficiencies and improve customer satisfaction.

e) Cash should be managed properly.

f) Effort should be made to reduce the current liabilities and to increase the current

asset.

g) Placing the responsibility for collecting the debt upon the centre that made the sale

[48]

HYPOTHESIS TESTING:

generally hypothesis means a mere assumption or some supposition to be proved or

disproved. Hypothesis is usually considered as the principle instrument in research. Its

main function is to suggest new experiments and observations.

Hypothesis: 1- The firm is facing difficulty in paying short-term debt.

The following table contains the details about the average collection period from

debtors and

average payment period to creditors from the period 2006-2007 to 2009-2010.

Years Average collection period (x)

Average payment period(y)

XY X2 y2

2006-2007 125 63 7875 15625 3969

2007-2008 85 61 5185 7225 3721

2008-2009 57 37 2109 3249 1369

2009-2010 126 86 10836 15876 7396

∑x= 393 ∑ Y=247 XY=26005

∑ x2 =

41975∑ y2 =16455

KARL PEARSONS’S COFFICIENT OF CORRELETION:

By putting the values in the formula the “r” came =0.86

From the calculation value of “r” come =0.86 which is a positive one. As the correlation

came a positive one which ensures that the firm is facing difficulty in paying short-term

debt. It is the case where current liabilities are increased throughout the financial years

from, 2006-2007, 2007-2008, 2008-2009 and 2009-2010.

[49]

HYPOTHESIS:2 THE FIRM IS NOT PROPERLY MANAGING THE SUNDRY

DEBTOR.

The following table contains average collection period from debtors and sundry debtors

(in crore) from the period 2006-2007 to 2009-2010.

years Average collection period (x)

sundry debtors(in crore)

XyX2 y2

2006-2007 125 80 10000 15625 6400

2007-2008 85 105 8925 7225 11025

2008-2009 57 106 6042 3249 11236

2009-2010 126 106 13356 15876 11236

∑x= 393 ∑Y=394 XY=38323∑ x2 =41975

∑ y2 =39897

KARL PERSON’S COFFICIENT OF CORRELETION:

The correlation came negative to the second hypothesis.

After putting the data “r” is found= -0.52. So the hypothesis is rejected. As the firm is

able to manage the sundry debtor.

[50]

HYPOTHESIS: 3- THE CURRENT LIABILITIES ARE INCREASING THAN

CURRENT ASSETS YEAR BY YEAR.

The following table contains the amount of current liabilities(in crore) and current assets

(in crore) from the period 2006-2007 to 2009-2010.

years CURRENT LIABILITIES(in crore)

CURRENT ASSETS(in crore) XY

X2 y2

2006-2007 251 322 80822 63001 103684

2007-2008 336 321 107856 112896 103041

2008-2009 729 631 459999 531441 398161

2009-2010 821 508 417068 674041 258064

∑x=2137 ∑Y=1782 XY= 1065745

∑ x2 = 1381379

∑ y2 = 862950

KARL PERSON’S COFFICIENT OF CORRELETION:

=0.88

As the hypothesis is positive which ensures that the current liabilities of firm is

increased at a speed than current assets. So the firm should have an eye to this one.

[51]

FINDINGS OF THE STUDY

Following are the findings of the study:

a) Working capital of three years i.e., (2007-2008, 2008-2009, 2009-2010) is in negative

figure. The reason is that the company’s current liabilities exceeds current assets from

2006-2007 to 2009-2010. The company created more provisions throughout this 3

years. Sundry creditors increased at a speed in these 3 years. It is an alarm sign for the

company. Besides these sundry creditors, other current liabilities also increased like

deposits and retention from supplies, liability for wealth tax, electricity duty payable.

b) The standard current ratio is 2:1. And for OPTCL it is not satisfactory. The reason

behind such result is that the current liabilities exceed current assets. The standard

current ratio for 2006-2007 is satisfactory but in the year 2007-2008, 2008-2009, 2009-

[52]

2010 situations becomes worst. The reason behind the increase in current liabilities and

provisions. It is not a good sign for the company.

c) The standard quick ratio is 1:1. And for OPTCL it is not satisfactory. The reason

behind OPTCL did not achieve the rule of thumb. The current liabilities exceed the

liquid assets. There is an increase in current liabilities like sundry creditor, interest

accrued but not due on loans, liability for wealth tax and liabilities for fringe benefit tax

than of liquid assets.

d) Absolute liquid test ratio is below 1:2, which are worries for OPTCL. The reason is

that liquid assets fall very short than current liabilities. The current liabilities again

exceed the absolute liquid assets. There is not significant increase in absolute current

assets like cash and bank balances from 2006-2007 to 2009-2010. But there is a rapid

increase in case of current liabilities like sundry creditors, deposits and retention from

suppliers, liabilities for fringe benefit tax and provisions.

e) Debtors of the company were high; they were increasing year by year, so more funds

were blocked in debtor. As the company is selling electricity to the sundry debtors and

the cash is not immediately received so some amount of cash is blocked in that matter.

f) The current asset trend increased from 2007 to 2009, but in 2010 it declines. The

current assets like stores and spare increased in 2006-2007 to 2007-2008 but in 2008-

2009 it declined and then it is increased in 2009-2010. Sundry debtors increased from

2006-2007 to 2007-2008 but it declined in 2008-2009 but again it is increased in 2009-

2010.

g) The current liabilities trend increasing at a speed which is worried thing for company.

Current liabilities like sundry creditors, deposits and retention from suppliers, interest

accured but not due on loans, liabilities for wealth tax, electricity duty payable,

liabilities for fringe benefit tax increased from 2006-2007 to 2009-2010.

h) Debtor’s turnover ratio improved from 2007 to 2009 and so number of collection

period decreases. But in 2010 debtor’s turnover ratio decreases and collection period

increases. In 2006-2007 it was 126 days. Then it is reduced to 85 and 57 days in 2007-

2008 and 2008-2009 respectively. But in 2009-2010 it again increased to 125 days.

j) Current asset ratio decrease throughout the year. It was 1.10 in 2006-2007 then it

increased to 1.29 then a fall down occurred as it was 1.08 in 2008-2009 and 0.60 in

2009-2010.

[53]

k) Working capital turnover ratio was positive in 2006-2007; it became negative in

2007-2008, 2008-2009 and 2009- 2010. It was 5.03 times in 2006-2007 then is sloped

downward and it was -15.7, -6.88, -0.97 in 2007-2008, 2008-2009, 2009-2010

respectively.

CHAPTER -6

CONCLUSION AND RECOMMENDATION

: CONCLUSION:

On the basis of data analysis on working capital management in OPTCL, the following

conclusions arrived.

a) The company has gross profit for the past four years (2006-07, 2007-08, 2008-09,

and 2009-10) in negatives and the current liabilities are increasing, in comparison to

current assets position. Hence, it is an alarming sign for the smooth working capital

management.

[54]

b) The OPTCL didn’t manage the liquidity position of the company. The liquidity

position was in a good condition and in 2006-07, it was also satisfactory. But, in the

year 2007-08, 2008-2009, 2009-10 the situation of liquidity position was alarming due

to increase in total current liabilities and decrease in total current assets which led to the

decrease in the net working capital of the company.

c) During the year 2006-07, 2007-08, 2008-2009 and 2009-2010 the company’s liquid

assets were not satisfactory.

d) The average collection period of the company during the year 2006--2007 is 125

days, it is reduced to 85 days in 2007-2008 and again it reduced to 57days in 2008-

2009, but the average collection period again increases to 126 days in 2009-2010.

e) There is also satisfactory net cash flow from the operating, investing and financing

activities of the organization.

f)Though the net working capital of the company is decreased, still the company is in a

better manageable position and the company’s present status of maintaining current

assets and current liabilities are satisfactory.

g) They are unable to manage their cash, funds and debts.

By adapting better management practices, the company may attain a sound financial

position in future and able to manage its working capital efficiently

RECOMMENDATION

OPTCL is the soul of Orissa’s power transmission and is playing a pivotal role in

making surplus power consumption state through efficiently administering the system of

transmission. For improvement of organization’s profitability, much emphasis is needed

to improve the better working capital management by decreasing the current liabilities

through reducing of unplanned over head expenses. In such process, current assets

position will be improved through collection of revenue from power transmission as

well as recovery of past dues from consumers, Govt. and other agencies etc. The

company should give more attention on increasing its collection of revenue from

wheeling of power and should give more emphasis to curtail unplanned expenses to

[55]

decreases the loss. Further, the management should focus on shortening its average

collection period by changing its credit terms and conditions.

By taking the above remedial measures, the organization can be an EVA+ company

with due emphasis on proper way of managing the working capital.

.

CHAPTER -7

IMPLICATION FOR FUTURE RESEARCH:

This study is the foundation stone for carrying out further research in the field of

working capital management. Further research can be also be carried out the study of

working capital management. This one of such preliminary research work and further

review of this research work can open up many dimensions for researchers. Although

the objective taken in research study is diverse, yet a trend can be observed from the

findings for future research work.

[56]

One of the major drawbacks of the study is the lack of time. Working capital

management is a very vast topic and hence in a limited time it is impossible to know

every aspects of working capital management. And also it was study that depended on

4years of data. There is future scope for studying these things.

[57]

DISCLAIMER

The present study of working capital management in OPTCL is purely academic in

nature. The analysis of the data and interpretation of the matters in the project report are

purely academic purpose and nobody should take it as a fact finding conclusion for

lodging any claim or submission of above facts for their personal benefits for which the

undersigned will not be held responsible. The views suggestions, conclusions etc. are

the bonfied work of mine and nobody should claim or copy it for their benefit without

permission.

……………...

[58]

BIBLIOGRAPHY

TEXT BOOKS:

1. Maheswari Dr S.n “Financial management”, Ninth edition, 2006 sultan chand & sons,

New Delhi

2. Pandey I.M., “Financial Management”, Vikas Publishing House Pvt.Ltd. 8th Edition

1999.

3. Prasanna Chandra, “Financial management”, Fourth edition 1999, Tata Mc.graw hill

publishing company ltd, New Delhi.

4. Gupta, sashi., “financial management”, 4th edition,2007, kalyani publisher, new delhi

5. Kothari C.R. “Research Methodology”, Wishva prakashan, New Delhi, 2001.

ARTICLES:

An overview of working capital management and corporate financing.

Working capital management.

Working Capital Management Manages Flow of Funds” (Year 2009)

“Working Capital Management-an Effective Tool for Organisational Success” Year

(2008)

Website:

www. Optcl.co.in

www. Google.com

www. Investopedia.com

www.moneycontrol.com

www.wikipedia.com

[59]

: ANNEXTURE:

BALANCE SHEETS OF OPTCL

PROFIT & LOSS ACCOUNTS OF OPTCL

[60]

[61]

BALANCE SHEETs OF OPTCL(IN RUPEES)

as on 31st march2010

as on 31st march 2009

as aon 31st

march 2008

as on 31st march 2007

i)sources of funds 1.shareholder’s funds

Share capital 881,255,000 831,255,000 600,700,000

600,700000

share reserves and surplus 6,824,666,950

5,531,676,826

5,368,362,657

5,143,178,990

7,705,921,950

6,362,931,826

5,969,062,657

5,743,878,990

2.loans funds Secured loans 2,970,843,09

94,034,967,5

735,094,601,2

56 6,121,296,5

84Unsecured loans 7,338,214,99

19,081,629,6

349,058,314,7

52 9,128,121,4

393. others funds

Consumer security deposit455,334

83,334 83,334

83,3

34ii)application of funds

1.fixed assets 26,037,473,415

24,152,614,571

22,725,369,686

20,664,373,798

Gross block Less: accumulated

depreciation12,519,750,1

3811,437,546,

54410,340,108,

668 9,241,049,6

78Net block 13,517,723,2

7712,715,068,

02712,385,261,

01811,423,324,1

20Capital work-in-progress 5,760,703,81

76,711,033,0

197,221,440,4

74 8,243,327,6

672.investments 270,550,000 270,550,00

0270,550,00

0 270,550,0

003.current assets, loans and

advances

Stores and spaces 969,056,460 808,519,278

766,865,262

751,064,690

Sundry debtors 1,055,631,698

1,055,097,473

1,052,479,982

798,196,201

Cash and bank balance 727,106,129 907,019,750

490,881,183

648,276,812

Other current assets 744,894,758 738,951,177

652,553,304

628,081,987

Loans and advances 1,582,686,333

2,786,157,419

143,339,572

389,406,739

Less: Current liabilities and

provisions

Current liabilities 2,517,996,79

92,476,486,0

462,055,168,7

641,677,146,69

7Provisions 5,695,667,47

54,817,002,6

031,304,517,7

44830,865,819

Net current assets -3,134,288,89

6

-997,743,55

3

-253,567,20

5

707,013,913

4(a) miscellaneous expenditure to the extent

not written off or adjustedare not written off or

3,026,423

6,052,846

9079269

PROFIT AND LOSS

ACCOUNTS

FOR THE YEAR ENDED31.03.2010 31.03.2009 31.03.2008 31.03.2007

INCOME

Revenue from wheeling of Power 3,05,16,27,568 6,78,92,95,427 3,99,75,58,798 3553494401

Other Income 1,36,62,18,959 36,84,47,083 28,21,03,171 168611550

Total 4,41,78,46,527 7,15,77,42,510 4,27,96,61,969 3722105951

EXPENDITURE

Administrative, General & Other

Expenses

3,49,84,56,298 5,27,76,66,633 2,39,99,88,627 1,42,31,94,067

Depreciation 1,08,03,34,520

1,09,82,4

1,352 1,08,54,85,700

986,381,451

Total 4,57,87,90,818 6,35,79,07,985 3,48,54,74,327 2,40,95,75,518

Profit/ (Loss) before interest & finance

charges

-16,09,44,291 78,18,34,525 79,41,87,642 1,31,25,30,433

Interest & Finance Charges -54,16,01,198 -97,24,54,617 -1,10,65,54,318 -1,16,23,12,531

Net prior period income/(expenditure) -1,11,72,155 75,90,209 27,58,67,293 -15,59,79,199

Profit/(Loss) before Taxation &

Contingency

-71,37,17,644 -18,30,29,884 -3,64,99,383 -57,61,297

Provision for taxation:-

Current year 0 0 0 0

Fringe Benefit Tax 0 0 -2113256 -2341534

Profit After Tax -71,37,17,644 -23,96,915 -38612639 -8102831

Reserve Appropriation ------------ -18,54,26,799 ------------ -------------

Appropriation to Contingencies Reserve -10,93,51,080 -9,99,26,786 -11,36,26,849 -8,24,85,483

Profit/(Loss) After Taxation &

Contingency Reserve

-82,30,68,724 -28,53,53,585 -15,22,39,488 -9,05,88,314

Balance of P&L Account Brought

Forward from Last Year

-77,76,78,451 -49,23,24,866 -34,00,85,378 -24,94,97,064

Balance Carried over to Balance Sheet -1,60,07,47,175 -77,76,78,451 -49,23,24,866 -34,00,85,378

[62]

Literature of working capital management

Documents

karl persons cofficient

fringe benefit tax

istanbul stock exchange

working capital considerations

electricity duty payable

smooth production runs

working capital efficiently

absolute liquid assets