L&T Finance

APROJECT REPORT ON

“WORKING CAPITAL MANAGEMENT

OF THE L & T.”

UNDER SUPERVISION OF:

--------------------

SUBMITTED BY

NAME : MRS. A.R. RAJALAKSHMI

ENROLLMENT NO :

STUDY CENTER CODE : REGIONAL CENTER :

Submitted in partial fulfillment of the requirements for qualifying

Master of Business Administration (FINANCE)

2011

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“WORKING CAPITAL MANAGEMENTOF THE L & T.”

Under Supervision of :

Submitted By:

Name :

Programme Code : MBA (FINANCE)

Enrollment No. :

Name of the Study Centre : Study Centre Code :

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CERTIFICATE OF ORIGINALITY

This is to certify that the project report entitled “Working Capital Management of

the L&T.” submitted to “Indira Gandhi National Open University” in partial

fulfillment of the requirement for the award of the Degree of “Master of Business

Administration” is an authentic and original work carried out by “A.R.

RAJALAKSHMI” with Enrolment No. ………………. under the guidance of

……………………….

The matter embodied in this project is genuine work done by the student and has not

been submitted whether to this University or to any other University / Institute for the

fulfillment of the requirement of any course of study.

………………………. ...…………………….

Signature of the Student: Signature of the Guide

Date:.……………….. Date:…………………

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ACKNOWLEDGEMENT

With Candor and Pleasure I take opportunity to express my sincere thanks and

obligation to my esteemed guide………. It is because of his able and mature guidance

and co-operation without which it would not have been possible for me to complete

my project.

It is my pleasant duty to thank all the staff member of the computer center who never

hesitated me from time during the project.

Finally, I gratefully acknowledge the support, encouragement & patience of my

family, and as always, nothing in my life would be possible without God, Thank You!

(A.R. RAJALAKSHMI)

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DECLARATION

I hereby declare that this project work titled “Working Capital Management of the

L&T.” is my original work and no part of it has been submitted for any other degree

purpose or published in any other from till date.

(A.R. RAJALAKSHMI)

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WORKING CAPITAL MANAGEMENT

OF THE L & T.

TABLE OF CONTENTS

S. NO. CONTENTS PAGE NO.

1. Title of the Project………………………….……………….……..7

2. Introduction ……..…………………………………………....…..8

3. Review of Literature …..…………………………………..…….35

4. Objectives of the Study……………………………………….….48

5. Research Methodology.……………………………………….....49

6. Data Analysis…………………….. ……………………….….....50

7. Conclusion and Major Finds….………………….….…….……..82

8. Recommendation and Limitation ……………………………….84

9. Bibliography……………………...………………………………85

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CHAPTER – 1

INTRODUCTION

COMPANY PROFILE:

Larsen & Toubro Limited (L&T) is a technology, engineering, construction and

manufacturing company. It is one of the largest and most respected companies in

India's private sector. Seven decades of a strong, customer-focused approach and the

continuous quest for world-class quality have enabled it to attain and sustain

leadership in all its major lines of business. L&T has an international presence, with

a global spread of offices. A thrust on international business has seen overseas

earnings grow significantly. It continues to grow its overseas manufacturing footprint,

with facilities in China and the Gulf region. The company's businesses are supported

by a wide marketing and distribution network, and have established a reputation for

strong customer support. L&T believes that progress must be achieved in harmony

with the environment. A commitment to community welfare and environmental

protection are an integral part of the corporate vision.

M/s Larsen & Toubro Ltd. ECC Division is prestigious organization having business

worldwide, its ECC Division undertake engineering contracts of various construction

in the field of Electrical, Mechanical & Civil Engineering.

The Company having its headquarter at Chennai, and whole India is distributed in

regions having respective regional headquarters, viz. Mumbai, Ahmadabad, Kolkata,

Delhi, Hyderabad, Chandigarh etc. which coordinate all activities of sites within their

region.

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Chattisgarh state have rich natural resources, coal is found in abundance thus various

thermal power plant are established at various places, Sipat Super Thermal Power

Plant is one of the biggest Thermal Power Plant, wherein our company execute

construction of Boiler Erection & Electrical Cabling works and some other misc.

works. Our Principal employer is M/s National Thermal Power Corporation Ltd.

The workforces consist of 2500 workmen and Engineers and staff in various cadre, the

workforce consist of employees from all over India.

Operating Divisions:

• Engineering & Construction Projects (E&C)

• Heavy Engineering (HED)

• Construction

• Power

• Electrical & Electronics (EBG)

• Machinery & Industrial Products (MIPD)

• IT & Technology Services

• Financial Services

• Railway Project

L&T's Signature of Excellence is evident on:

• Hydrocarbon projects executed in India, the Middle East and South East Asia.

• Power projects executed in India, the Gulf and Sri Lanka.

• The world's largest coal gasifier made in India and exported to China

• The world’s biggest EO reactor for a petrochemical complex in the Gulf

• The world’s largest FCC regenerator for a refinery

• Asia’s highest viaduct

• The world’s longest limestone conveyor

• L&T played a critical role in building India’s first nuclear powered submarine

• L&T played a major role in India's maiden moon mission

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http://www.larsentoubro.com/lntcorporate/common/ui_templates/homepage_news.aspx?res=P_ENC

http://www.larsentoubro.com/lntcorporate/common/ui_templates/homepage_news.aspx?res=P_ENC_COFF_FRLW&sbu=133

http://www.lntinfotech.com/

http://www.larsentoubro.com/lntcorporate/common/ui_templates/homepage_news.aspx?res=P_MIPD

http://www.larsentoubro.com/lntcorporate/common/ui_templates/homepage_news.aspx?res=P_EBG

http://www.larsentoubro.com/lntcorporate/common/ui_templates/homepage_news.aspx?res=P_PWR

http://www.larsentoubro.com/lntcorporate/common/ui_templates/homepage_news.aspx?res=P_ECC

http://www.larsentoubro.com/lntcorporate/common/ui_templates/homepage_news.aspx?res=P_HED

HISTORY OF CONCERN

The evolution of L&T into the country's largest engineering and construction

organization is among the most remarkable success stories in Indian industry.

L&T was founded in Bombay (Mumbai) in 1938 by two Danish engineers, Henning

Holck-Larsen and Soren Kristian Toubro. Both of them were strongly committed to

developing India's engineering capabilities to meet the demands of industry.

Henning Holck-Larsen (4.7.1907 - 27.7.2003)

Beginning with the import of machinery from Europe, L&T rapidly took on

engineering and construction assignments of increasing sophistication. Today, the

company sets global engineering benchmarks in terms of scale and complexity.

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Soren Kristian Toubro (27.02.1906 4.3.1982)

EARLY DAYS

THE JOURNEY

In 1944, ECC was incorporated. Around then, L&T decided to build a portfolio of

foreign collaborations. By 1945, the Company represented British manufacturers of

equipment used to manufacture products such as hydrogenated oils, biscuits, soaps and

glass. In 1945, L&T signed an agreement with Caterpillar Tractor Company, USA, for

marketing earthmoving equipment. At the end of the war, large numbers of war-

surplus Caterpillar equipment were available at attractive prices, but the finances

required were beyond the capacity of the partners. This prompted them to raise

additional equity capital, and on 7th February 1946, Larsen & Toubro Private Limited

was born.

Independence and the subsequent demand for technology and expertise offered L&T

the opportunity to consolidate and expand. Offices were set up in Kolkata (Calcutta),

Chennai (Madras) and New Delhi. In 1948, fifty-five acres of undeveloped marsh and

jungle was acquired in Powai. Today, Powai stands as a tribute to the vision of the

men who transformed this uninhabitable swamp into a manufacturing landmark.

PUBLIC LIMITED COMPANY:

In December 1950, L&T became a Public Company with a paid-up capital of Rs.2

million. The sales turnover in that year was Rs.10.9 million.

Prestigious orders executed by the Company during this period included the Amul

Dairy at Anand and Blast Furnaces at Rourkela Steel Plant. With the successful

completion of these jobs, L&T emerged as the largest erection contractor in the

country.

In 1956, a major part of the company's Bombay office moved to ICI House in Ballard

Estate. A decade later this imposing grey-stone building was purchased by L&T, and

renamed as L&T House - its Corporate Office.

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Henning Holck-Larsen and Soren Kristian Toubro, school-mates in Denmark, would

not have dreamt, as they were learning about India in history classes that they would,

one day, create history in that land.

In 1938, the two friends decided to forgo the comforts of working in Europe, and

started their own operation in India. All they had was a dream. And the courage to

dare.

Their first office in Mumbai (Bombay) was so small that only one of the partners

could use the office at a time!

In the early years, they represented Danish manufacturers of dairy equipment for a

modest retainer. But with the start of the Second World War in 1939, imports were

restricted, compelling them to start a small work-shop to undertake jobs and provide

service facilities.

Germany's invasion of Denmark in 1940 stopped supplies of Danish products. This

crisis forced the partners to stand on their own feet and innovate. They started

manufacturing dairy equipment indigenously. These products proved to be a success,

and L&T came to be recognised as a reliable fabricator with high standards.

The war-time need to repair and refit ships offered L&T an opportunity, and led to the

formation of a new company, Hilda Ltd., to handle these operations. L&T also started

two repair and fabrication shops - the Company had begun to expand.

Again, the sudden internment of German engineers (because of the War) who were to

put up a soda ash plant for the Tatas, gave L&T a chance to enter the field of

installation - an area where their capability became well respected.

The sixties saw a significant change at L&T - S. K. Toubro retired from active

management in 1962.

The sixties were also a decade of rapid growth for the company, and witnessed the

formation of many new ventures: UTMAL (set up in 1960), Audco India Limited

(1961), Eutectic Welding Alloys (1962) and TENGL (1963).

EXPANDING HORIZONS:

By 1964, L&T had widened its capabilities to include some of the best technologies in

the world. In the decade that followed, the company grew rapidly, and by 1973 had

become one of the Top-25 Indian companies.

In 1976, Holck-Larsen was awarded the Magsaysay Award for International

Understanding in recognition of his contribution to India's industrial development. He

retired as Chairman in 1978.

In the decades that followed, the company grew into an engineering major under the

guidance of leaders like N. M. Desai, S.R. Subramaniam, U. V. Rao, S. D. Kulkarni

and A. M. Naik.

Today, L&T is one of India's biggest and best known industrial organisations with a

reputation for technological excellence, high quality of products and services, and

strong customer orientation. It is also taking steps to grow its international presence.

For an institution that has grown to legendary proportions, there cannot and must not

be an 'end'. Unlike other stories, the L&T saga continues...

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VISION

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The L&T vision reflects the collective goal of the company. It was drafted through a

large scale interactive process which engaged employees at every level, worldwide.

AWARDS & RECOGNITIONS:

Major Awards Received by L&T in 2011L&T CMD Ranks among Top News

Makers in Indian and Global Media

Mr. A.M. Naik, Chairman & Managing Director, L&T, has emerged as among the

most high profile of India’s corporate leaders in the Indian and the global media. A

recent survey of press citations saw Mr. Naik’s rankings soar among the country’s

news makers. He was ranked Number 10 in the Indian media, having seen a rise of

157 per cent. In the survey of global media, Mr. Naik is ranked 12th.

L&T CMD Honoured with CHEMTECH Hall of Fame Award

In recognition of L&T’s CMD, Mr. A.M. Naik’s stellar contributions to the industry

and nation, the Mumbai based CHEMTECH Foundation has conferred on him its

prestigious Hall of Fame - Leadership & Excellence Award 2011. (February 24, 2011)

L&T bags ’India Shining Star Award’ for Outstanding CSR

L&T bagged the ’India Shining Star CSR Award’, instituted by the Wockhardt

Foundation, for Outstanding CSR in the sector for companies engaged in heavy

engineering. (February 19, 2011)

L&T wins Award for ’Company with Best CSR & Sustainability Practices-2011’

L&T’s CSR initiatives were again in the limelight as it bagged the award for

’Company with the Best CSR and Sustainability Practices’ by the Asian Centre for

Corporate Governance and Sustainability. The award was presented at the 11th

International Conference of the Centre in Mumbai on February 11, 2011.

L&T wins Top Honours in Businessworld’s ’Most Respected Company - 2011’

Rankings

Leading business magazine, Businessworld’s rankings of ’Most Respected

Companies’ saw stellar honours for L&T. In the sector-wise survey, L&T was ranked

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’India’s Most Respected Company’ in the Infrastructure category. In the overall

rankings, L&T emerged second.

ICAI Bestows Top Honour on Mr. Y.M. Deosthalee, CFO, L&T

The Institute of Chartered Accountants of India (ICAI) – the country’s apex body of

Chartered Accountants – has bestowed its highest honour, ‘Business Achiever –

Corporate’ for the year 2010 on Mr. Y.M. Deosthalee, CFO, L&T, for his outstanding

contribution to business leadership as a finance professional. The institute saluted his

role in providing strategic direction to the business of financial services, development

projects and Information Technology of the L&T Group. (January 30, 2011)

Finance Minister Presents Coveted ET Company of the Year Award to Mr. A.M.

Naik

BOARD OF DIRECTORS :

Director Name Designation

A M Naik Chairman & Managing DirectorS N Talwar Non Executive DirectorM M Chitale Non Executive DirectorS Rajgopal Non Executive DirectorSubodh Bhargav Non Executive DirectorJ S Bindra Non Executive Director

V K MagapuWhole-time Director & Senior Executive Vice

President - IT & Technology ServicesY M Deosthalee Whole-time Director & CFO

M V KotwalWhole-time Director & Senior Executive Vice

President - Heavy Engineering

J P NayakWhole-time Director & President - Machiney &

Industrial ProductsK V Rangaswami Whole Time Director & President

K VenkataramananWhole-time Director & President - Engineering &

Constrution ProjectsRavi Uppal Whole-time DirectorN Mohan Raj Nominee of LICA K Jain Nominee

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Bhagyam Ramani NomineeThomas Mathew T Nominee of LICN Hariharan Company Secretary

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THEORY OF WORKING CAPITAL

WORKING CAPITAL MANAGEMENT

Working Capital is the amount of capital that a business has available to meet the day

to day cash requirements of its operations. It is concerned with the problem arise in

attempting to manage the current assets, the current liabilities and the inter

relationship that exist between them. Working Capital is the difference between

resources in cash or readily convertible into cash and organizational commitments for

which cash will soon be required or within one year without undergoing a diminution

in value and without disrupting the operation of the firm. It also refers to the amount

of current Assets that exceeds current Liabilities.

Working Capital refers to that part of the firm capital, which is required for financing

Short-Term or Current Assets such as Cash, Marketable Securities, Debtors and

Inventories. Working Capital is also known as Revolving or Circulating Capital or

Short Term Capital.

The goal of working capital management is to manage the firm’s current assets and

current liabilities in such way that the satisfactory level of working capital is

mentioned. The current should be large enough to cover its current liabilities in order

to ensure a reasonable margin of the safety.

Capital required for a business can be classifies under two main categories:

• Fixed Capital

• Working Capital

Every business needs funds for two purposes for its establishments and to carry out

day to day operations. Long term funds are required to create production facilities

through purchase of fixed assets such as plant and machinery, land and building,

furniture etc. Investments in these assets are representing that part of firm’s capital

which is blocked on a permanent or fixed basis and is called fixed capital. Funds are

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also needed for short term purposes for the purchasing of raw materials, payments of

wages and other day to day expenses etc. These funds are known as working capital.

In simple words, Working capital refers to that part of the firm’s capital which is

required for financing short term or current assets such as cash, marketable securities,

debtors and inventories.

CONCEPTS OF WORKING CAPITAL:

There are two concepts of working capital:

• Balance Sheet concepts

• Operating Cycle or circular flow concept

BALANCE SHEET CONCEPT:

There are two interpretation of working capital under the balance sheet concept:

• Gross Working Capital

• Net Working Capital

The term working capital refers to the Gross working capital and represents the

amount of funds invested in current assets. Thus, the gross working capital is the

capital invested in total current assets of the enterprises. Current assets are those assets

which are converted into cash within short periods of normally one accounting year.

Example of current assets is:

Constituents of Current Assets:

• Cash in hand and Bank balance

• Bills Receivable

• Sundry Debtors

• Short term Loans and Advances

• Inventories of Stock as:

Raw Materials

Work in Process

Stores and Spaces

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Finished Goods

• Temporary Investments of Surplus Funds

• Prepaid Expenses

• Accrued Incomes

The term working capital refers to the net working capital. Net working capital is the

excess of current assets over current liabilities or say:

Net Working Capital = Current Assets – Current Liabilities.

NET WORKING CAPITAL MAY BE NEGATIVE OR POSITIVE:

When the current assets exceed the current liabilities, the working capital is positive

and the negative working capital results when the current liabilities are more than the

current assets. Current liabilities are those liabilities which are intended to be paid in

the ordinary course of business within a short period of normally one accounting year

of the current assets or the income of the business. Examples of current liabilities are:

CONSTITUENTS OF CURRENT LIBILITIES:

• Bills Payable

• Sundry Creditors or Account Payable

• Accrued or Outstanding Expenses

• Short term Loans, Advances and Deposits

• Dividends Payable

• Bank Overdraft

• Provision for Taxation, If does not amount to appropriation of profits.

The gross working capital concept is financial or going concern concept whereas net

working capital is an accounting concept of working capital.

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OPERATING CYCLE OR CIRCULATING CASH FORMAT:

Working Capital refers to that part of firm’s capital which is required for financing

short term or current assets such as cash, marketable securities, debtors and

inventories. Funds thus invested in current assets keep revolving fast and being

constantly converted into cash and these cash flows out again in exchange for other

current assets. Hence it is also known as revolving or circulating capital. The circular

flow concept of working capital is based upon this operating or working capital cycle

of a firm. The cycle starts with the purchase of raw material and other resources

And ends with the realization of cash from the sales of finished goods. It involves

purchase of raw material and stores, its conversion into stocks of finished goods

through work in progress with progressive increment of labor and service cost,

conversion of finished stocks into sales, debtors and receivables and ultimately

realization of cash and this cycle continuous again from cash to purchase of raw

materials and so on. The speed/ time of duration required to complete one cycle

determines the requirements of working capital longer the period of cycle, larger is the

requirement of working capital.

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Receivable conversion period Raw material storage (RCP) conversion period (RMSCP)

Cash received form Debtors and paid to suppliers Of raw materials

Sales of finished Raw materials Goods introduced into process

Finished Goods Produced

Finished goods conversion Work in process Period (FGCP) Conversion period (WIPCP)

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The gross operating cycle of a firm is equal to the length of the inventories and

receivables conversion periods. Thus,

Where,

RMCP = Raw Material Conversion Period

WIPCP = Work –in- Process Conversion Period

FGCP = Finished Goods Conversion Period

RCP = Receivables Conversion Period

However, a firm may acquire some resources on credit and thus defer payments for

certain period. In that case, net operating cycle period can be calculated as below:

Further, following formula can be used to determine the conversion periods.

Raw Material Conversion Period = Average Stock of Raw Material.

Raw Material Consumption per day

Work in process Conversion Period = Average Stock of Work-in-Progress

Total Cost of Production per day

Finished Goods Conversion Period = Average Stock of Finished Goods

Total Cost of Goods sold per day

Receivables Conversion Period = Average Accounts Receivables

Net Credit Sales per day

Payable Deferral Period = Average Payable

Net Credit Purchase per day

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Gross Operating Cycle = RMCP + WIPCP + FGCP + RCP

Net Operating Cycle Period = Gross Operating Cycle Period – Payable Deferral period

CLASSIFICATION OR KIND OF WORKING CAPITAL:

Working capital may be classified in two ways:

• On the basis of concept

• On the basis of time

On the basis of concept, working capital is classified as gross working capital and net

working capital. The classification is important from the point of view of the financial

manager.

On the basis of time, working capital may be classified as:

• Permanent or Fixed working capital

• Temporary or Variable working capital.

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On the basis of concept On the basis of time

Net Working Capital

Permanent or Fixed Working CapitalGross Working

Capital

Temporary orVariable Working Capital

Kinds of Working Capital

Reserve Working Capital

Regular Working Capital

Special Working Capital

Seasonal Working Capital

1. PERMANENT OR FIXED WORKING CAPITAL:

Permanent or fixed working capital is the minimum amount which is required to

ensure effective utilization of fixed facilities and for maintaining the circulation of

current assets. There is always a minimum level of current assets which is

continuously required by the enterprises to carry out its normal business operations.

2. TEMPRORAY OR VARIABLE WORKING CAPITAL:

Temporary or variable working capital is the amount of working capital which is

required to meet the seasonal demands and some special exigencies.Varibles working

capital can be further classified as second working capital and special working capital.

The capital required to meet the seasonal needs of the enterprises is called the seasonal

working capital.

Temporary working capital differs from permanent working capital in the sense that is

required for short periods and cannot be permanently employed gainfully in the

business

IMPORATNCE OR ADVANTAGE OF ADEQUATE WORKING

CAPITAL:

Working capital is the life blood and nerve centre of a business. Just a circulation of a

blood is essential in the human body for maintaining life, working capital is very

essential to maintain the smooth running of a business. No business can run

successfully without an adequate amount of working capital. The main advantages of

maintaining adequate amount of working capital are as follows:

• Solvency of the Business

• Goodwill

• Easy Loans

• Cash discounts

• Regular supply of Raw Materials

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• Regular payments of salaries, wages & other day to day commitments.

• Exploitation of favorable market conditions

• Ability of crisis

• Quick and regular return on investments

• High morals

THE NEED OR OBJECTS OF WORKING CAPITAL:

The need for working capital cannot be emphasized. Every business needs some

amount of working capital. The need of working capital arises due to the time gap

between production and realization of cash from sales. There is an operating cycle

involved in the sales and realization of cash. There are time gaps in purchase of raw

materials and production, production and sales,

And sales, and realization of cash, thus, working capital is needed for the following

purposes:

For the purchase of raw materials , components and spaces.

To pay wages and salaries.

To incur day to day expenses and overhead costs such as fuel, power and office

expenses etc.

To meet the selling costs as packing, advertising etc.

To provide credit facilities to the customers.

To maintain the inventories of raw materials, work –in- progress, stores and spares

and finished stock.

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FACTORS DETERMING THE WORKING CAPITAL REQUIRMENT :

The working capital requirements of a concern depend upon a large number of factors

such as nature and size of the business, the characteristics of their operations, the

length of production cycle, the rate of stock turnover and the state of economic

situation. However the following are the important factors generally influencing the

working capital requirements.

• NATURE OR CHARACTERSTICS OF A BUSINESS :

The nature and the working capital requirement of enterprises are interlinked. While a

manufacturing industry has a long cycle of operation of the working capital, the same

would be short in an enterprises involve in providing services. The amount required

also varies as per the nature, an enterprises involved in production would required

more working capital then a service sector enterprise.

• MANAFACTURE PRODUCTION POLICY:

Each enterprises in the manufacturing sector has its own production policy, some

follow the policy of uniform production even if the demand varies from time to time

and other may follow the principles of demand based production in which production

is based on the demand during the particular phase of time. Accordingly the working

capital requirements vary for both of them.

• OPERATIONS:

The requirement of working capital fluctuates for seasonal business. The working

capital needs of such business may increase considerably during the busy.

• MARKET CONDITION:

If there is a high competition in the chosen project category then one shall need to

offer sops like credit, immediate delivery of goods etc for which the working capital

requirement will be high. Otherwise if there is no competition or less competition in

the market then the working capital requirements will be low.

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• AVABILITY OF RAW MATERIAL:

If raw material is readily available then one need not maintain a large stock of the

same thereby reducing the working capital investment in the raw material stock . On

other hand if raw material is not readily available then a large inventory stocks need to

be maintained, there by calling for substantial investment in the same.

• GROWTH AND EXAPNSION:

Growth and Expansions in the volume of business result in enhancement of the

working capital requirements. As business growth and expands it needs a larger

amount of the working capital. Normally the needs for increased working capital

funds processed growth in business activities.

• PRICE LEVEL CHANGES :

Generally raising price level requires a higher investment in the working capital. With

increasing prices, the same levels of current assets needs enhanced investments.

• MANAFACTURING CYCLE:

The manufacturing cycle starts with the purchase of raw material and is completed

with the production of finished goods. If the manufacturing cycle involves a longer

period the need for working capital would be more. At time business needs to estimate

the requirement of working capital in advance for proper control and management.

The factors discussed above influence the quantum of working capital in the business.

The assessment of the working capital requirement is made keeping this factor in

view. Each constituents of the working capital retains it form for a certain period and

that holding period is determined by the factors discussed above. So for correct

assessment of the working capital requirement the duration at various stages of the

working capital cycle is estimated. Thereafter proper value is assigned to the

respective current assets, depending on its level of completion. The basis for assigning

value to each component is given below:

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Each constituent of the working capital is valued on the basis of valuation Enumerated

above for the holding period estimated. The total of all such valuation becomes the

total estimated working capital requirement. The assessment of the working capital

should be accurate even in the case of small and micro enterprises where business

operation is not very large. We know that working capital has a very close relationship

with day-to-day operations of a business. Negligence in proper assessment of the

working capital, therefore, can affect the day-to-day operations severely. It may lead

to cash crisis and ultimately to liquidation. An inaccurate assessment of the working

capital may cause either under-assessment or over-assessment of the working capital

and both of them are dangerous.

PRINCIPLES OF WORKING CAPITAL MANAGEMENT POLICY:

The following are the general principles of a sound working capital management

policy:

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COMPONENTS OF WORKING CAPITAL BASIS OF VALUATION

Stock of Raw Material Purchase of Raw Material

Stock of Work -in- Process At cost of Market value which is lower

Stock of finished Goods Cost of Production

Debtors Cost of Sales or Sales Value

Cash Working Expenses

PRINCIPLES OF WORKING CAPITAL MANAGEMNT POLICY

PRINCIPLES OF RISK VARIATIONS

PRINCIPLES OF COST OF CAPITAL

PRINCIPLES OF EQUITY PRINCIPLES

PRINCIPLES OF MATURITY OF PAYMENTS

1. PRINCIPLE OF RISK VARAITAION (CURRENT ASSETS POLICY):

Risk here refers to the inability of a firm to meet its obligations as and when they

become due for payment. Larger investment in current Assets with less dependence on

short term borrowings, increase liquidity, reduces risk and thereby decreases the

opportunity for gain or loss. On the other hand less investments in current assets with

greater dependence on short term borrowings, reduces liquidity and increase

profitability. In other words there is a definite inverse relationship between the degree

of risk and profitability. In other words, there is a definite inverse relationship

between the risk and profitability. A conservative management prefers to minimize

risk by maintaining a higher level of current assets or working capital while a liberal

management assumes greater risk by reducing working capital. However, the goal of

management should be to establish a suitable tradeoff between profitability and risk.

2. PRINCIPLES OF COST OF CAPITAL:

The various source of raising working capital finance have different cost of capital

and the degree of risk involved. Generally, higher and risk however the risk lower is

the cost and lower the risk higher is the cost. A sound working capital management

should always try to achieve a proper balance between these two.

3. PRINCIPLE OF EQUITY POSITION:

The principle is concerned with planning the total investments in current assets.

According to this principle, the amount of working capital invested in each component

should be adequately justified by a firm’s equity position. Every rupee invested in

current assets should contribute to the net worth of the firm. The level of current assets

may be measured with the help of two ratios:

1. Current assets as a percentage of total assets and

2. Current assets as a percentage of total sales

While deciding about the composition of current assets, the financial manager may

consider the relevant industrial averages.

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4. PRINCIPLES OF MATURITY OF PAYMENT:

The principle is concerned with planning the source of finance for working capital.

According to the principles, a firm should make every effort to relate maturities of

payment to its flow of internally generated funds. Maturity pattern of various current

obligations is an important factor in risk assumptions and risk assessments. Generally

shorter the maturity schedule of current liabilities in relation to expected cash inflows,

the greater the inability to meet its obligations in time.

CONSEQUENCES OF UNDER ASSESMENT OF WORKING CAPITAL:

Growth may be stunted. It may become difficult for the enterprises to undertake

profitable projects due to non availability of working capital.

Implementations of operating plans may brome difficult and consequently the

profit goals may not be achieved.

Cash crisis may emerge due to paucity of working funds.

Optimum capacity utilization of fixed assets may not be achieved due to non

availability of the working capital.

The business may fail to honour its commitment in time thereby adversely affecting

its creditability. This situation may lead to business closure.

The business may be compelled to by raw materials on credit and sell finished goods

on cash. In the process it may end up with increasing cost of purchase and reducing

selling price by offering discounts. Both the situation would affect profitable

adversely.

Now avaibility of stocks due to non availability of funds may result in production

stoppage. While underassessment of working capital has disastrous implications on

business overassesments of working capital also has its own dangerous.

30

CONSEQUENCES OF OUR OWN ASSESMNET OF WORKING CAPITAL:

Excess of working capital may result in un necessary accumulation of

inventories.

It may lead to offer too liberal credit terms to buyers and very poor recovery

system & cash management.

It may make management complacent leading to its inefficiency.

Over investment in working capital makes capital less productive and may

reduce return on investment.

Working Capital is very essential for success of business & therefore needs efficient

management and control. Each of the components of working capital needs proper

management to optimize profit.

INVENTORY MANAGEMNT:

Inventory includes all type of stocks. For effective working capital management,

inventory needs to be managed effectively. The level of inventory should be such that

the total cost of ordering and holding inventory is the least. Simultaneously stock out

costs should be minimized. Business therefore should fix the minimum safety stock

level reorder level of ordering quantity so that the inventory costs is reduced and outs

management become efficient.

31

InventoryManagement

RECEIVABLE MANAGEMENT:

Given a choice, every business would prefer selling its produce on cash basis.

However, due to factors like trade policies, prevailing market conditions etc. Business

are compelled to sells their goods on credit. In certain circumstances a business may

deliberately extend credit as a strategy of increasing sales. Extending credit means

creating current assets in the form of debtors or account receivables. Investment in the

type of current assets needs proper and effective management as, it gives rise to costs

such as:

Cost of carrying receivables

Cost of bad debts losses

Thus the objective of any management policy pertaining to accounts receivables

would be to ensure the benefits arising due to the receivables are more than the costs

incurred for the receivables and the gap between benefit and costs increased resulting

in increase profits. An effective control of receivables help a great deal in properly

managing it. Each business should therefore try to find out coverage credit extends to

its clients using the below given formula:

Average Credit = Total amount of receivable

(Extend in days) Average credit sale per day

Each business should project expected sales and expected investments in receivable

based on various factor, which influence the working capital requirement. From this it

would be possible to find out the average credit days using the above given formula. A

business should continuously try to monitor the credit days and see that the average.

Credit offer to clients is not crossing the budgeted period otherwise the requirement of

investment in the working capital would increase and as a result, activities may get

squeezed. This may lead to cash crisis.

32

CASH BUDGET:

Cash budget basically incorporates estimates of future inflow and outflows of cash

cover a projected short period of time which may usually be a year, a half or a quarter

year. Effective cash management is facilities if the cash budget is further broken down

into months, weeks or even a daily basis.

There are two components of cash budget are:

1. Cash inflows

2. Cash outflows

The main sources for these flows are given here under:

1. Cash Sales

2. Cash received from debtors

3. Cash received from Loans, deposits etc.

4. Cash receipts other revenue income

5. Cash received from sale of investment or assets.

CASH OUTFLOWS:

1. Cash Purchase

2. Cash payments to Creditors

3. Cash payment for other revenue expenditure

4. Cash payment for assets creation

5. Cash payments for withdrawals, taxes.

6. Repayments of Loan etc.

A suggestive for, at for cash budget is given below:

33

MONTHS PARTICULARS JANUARY FERBUARY MARCH Estimated cash inflows ……………………………… …………………………………. I. Total cash inflows Estimated cash outflows …………………………….. ………………………….. II. Total cash outflows III. Opening cash balances IV. Add/deduct surplus/deflictduring the month ( I-II) V. Closing cash balances (III -IV) VI. Minimum level of cash balance VII. Estimated excess or short fall of cash (V-VI)

CHAPTER – 2

REVIEW OF LITERATURE

Every business needs funds for two purposes basically; they are for establishment

and to carry day-to-day operations. Long term funds are required for establishment

of the organization, it is required for production facility through purchase of fixed

assets and it needs fixed capital and the funds which are needed for short term

purposes for the purchase of raw materials, payment of wages, payment of day to

day expenses etc, the funds required for these are known as WORKING CAPITAL.

Working capital refers to that part of the firm's capital which is required for

financing short term or current assets such as cash, marketable securities, debtors

and inventories. Funds, thus, invested in current assets keep revolving fast and are

being constantly converted into cash and this cash flow out in exchange for other

current assets. Hence it is also known as CIRCULATING CAPITAL or

REVOLVING CAPITAL or SHORT TERM CAPITAL.

According to GENESTENBERG:-

"Circulating capital means current assets of a company that are changed in the

ordinary course of business from one form to another, as for example, from cash to

inventories, inventories to receivables into cash."

Need for working capital cannot be over emphasized. Every business needs some

amount of working capital. The need of working capital arises due to the time gap

between production and realization of cash from sales. Thus, the working capital is

needed for the following purposes:-

a) For the purchase of raw materials, components and spares.

b) To pay wages and salaries.

c) To incur day-to-day expenses and overhead costs such as fuel, power and

office expenses etc.

d) To met the selling costs as packing, advertising etc.

34

e) To provide credit facility to customers.

f) To maintain the inventories of raw material, work-in-progress, stores and

spares and finished stock.

For studying the need of working capital in a business, one has to study the business

under varying circumstances such as a new concern, as a going concern and as one

which has attained maturity.

Many researchers have studied working capital from different views and in different

environments. The following ones were very interesting and useful for our research

According to Eljelly, in 2004:-

Elucidated that efficient liquidity management involves planning and controlling

current assets and current liabilities in such a manner that eliminates the risk of

inability to meet due short-term obligations and avoids excessive investment in these

assets. The relation between profitability and liquidity was examined, as measured by

current ratio and cash gap (cash conversion cycle) on a sample of joint stock

companies in Saudi Arabia using correlation and regression analysis. The study found

that the cash conversion cycle was of more importance as a measure of liquidity than

the current ratio that affects profitability. The size variable was found to have

significant effect on profitability at the industry level. The results were stable and had

important implications for liquidity management in various Saudi companies. First, it

was clear that there was a negative relationship between profitability and liquidity

indicators such as current ratio and cash gap in the Saudi sample examined.

Second, the study also revealed that there was great variation among industries with

respect to the significant measure of liquidity.

According to Deloof, in 2003:-

Discussed that most firms had a large amount of cash invested in working capital. It

can therefore be expected that the way in which working capital is managed will have

a significant impact on profitability of those firms. Using correlation and regression

tests he found a significant negative relationship between gross operating income and

the number of days accounts receivable, inventories and accounts payable of Belgian

35

firms. On basis of these results he suggested that managers could create value for their

shareholders by reducing the number of days accounts receivable and inventories to a

reasonable minimum. The negative relationship between accounts payable and

profitability is consistent with the view that less profitable firms wait longer to pay

their bills.

According to Ghosh and Maji, in 2003:-

In this paper made an attempt to examine the efficiency of working capital

management of the Indian cement companies during 1992 – 1993 to 2001 – 2002. For

measuring the efficiency of working capital management, performance, utilization,

and overall efficiency indices were calculated instead of using some common working

capital management ratios. Setting industry norms as target-efficiency levels of the

individual firms, this paper also tested the speed of achieving that target level of

efficiency by an individual firm during the period of study. Findings of the study

indicated that the Indian Cement Industry as a whole did not perform remarkably well

during this period.

According to Shin and Soenen, in 1998:-

highlighted that efficient Working Capital Management (WCM) was very important

for creating value for the shareholders. The way working capital was managed had a

significant impact on both profitability and liquidity. The relationship between the

lengths of Net Trading Cycle, corporate profitability and risk adjusted stock return

was examined using correlation and regression analysis, by industry and capital

intensity. They found a strong negative relationship between lengths of the firm’s net

trading Cycle and its profitability. In addition, shorter net trade cycles were associated

with higher risk adjusted stock returns.

The Effect of Working Capital Management on Firm Profitability: Evidence

from Turkey

F. Samiloglu and K. Demirgunes (2008)

The aim of this study is to analyze the effect of working capital management on firm

36

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 manufacturing firms for the

period of 1998-2007 has been analyzed under a multiple regression model. Empirical

findings of the study show that accounts receivables period, inventory period and

leverage affect firm profitability negatively, while growth (in sales) affects firm

profitability positively.

All the above studies provide us a solid base and give us idea regarding working

capital

management and its components. They also give us the results and conclusions of

those researches already conducted on the same area for different countries and

environment from different aspects. On basis of these researches done in different

countries, we have developed our own methodology for research.

According to Smith and Begemann 1997:-

Emphasized that those who promoted working capital theory shared that profitability

and liquidity comprised the salient goals of working capital management. The

problem arose because the maximization of the firm's returns could seriously threaten

its liquidity, and the pursuit of liquidity had a tendency to dilute returns. This article

evaluated the association between traditional and alternative working capital measures

and return on investment (ROI), specifically in industrial firms listed on the

Johannesburg Stock Exchange (JSE). The problem under investigation was to

establish whether the more recently developed alternative working capital concepts

showed improved association with return on investment to that of traditional working

capital ratios or not. Results indicated that there were no significant differences

amongst the years with respect to the independent variables. The results of their

stepwise regression corroborated that total current liabilities divided by funds flow

accounted for most of the variability in Return on Investment (ROI). The statistical

test results showed that a traditional working capital leverage ratio, current liabilities

divided by funds flow, displayed the greatest associations with return on investment.

Wellknown liquidity concepts such as the current and quick ratios registered

37

insignificant associations whilst only one of the newer working capital concepts, the

comprehensive liquidity index, indicated significant associations with return on

investment. All the above studies provide us a solid base and give us idea regarding

working capital management and its components. They also give us the results and

conclusions of those researches already conducted on the same area for different

countries and environment from different aspects. On basis of these researches done in

different countries, we have developed our own methodology for research.

According to Marc Deloof 25th April 2003:-

The relation between working capital management and corporate profitablity is

investigated for a sample of 1,009 large Belgian non-financial firms for the 1992-1996

period. Trade credit policy and inventory policy are measured by number of days

accounts receivable, accounts payable and inventories, and the cash conversion cycle

is used as a comprehensice measure of working capital management. The results

suggest that managers can increase corporate profitablity by reducing the number of

days accounts receivable and inventories. Less profitable firms wait longer to pay

their bills.

M. A., Zariyawati a, M. N., Annuar b and A.S., Abdul Rahim c a ,b & c

Univeristi Putra Malaysia, Malaysia.

Working capital management is important part in firm financial management decision.

An optimal working capital management is expected to contribute positively to the

creation of firm value. To reach optimal working capital management firm manager

should control the trade off between profitability and liquidity accurately. The purpose

of this study is to investigate the relationship between working capital management

and firm profitability. Cash conversion cycle is used as measure of working capital

management. This study is used panel data of 1628 firm-year for the period of 1996-

2006 that consist of six different economic sectors which are listed in Bursa Malaysia.

The coefficient results of Pooled OLS regression analysis provide a strong negative

significant relationship between

38

Amber Collins University of Phoenix:-

Working Capital Management Concepts Worksheet Concept Application of Concept

in the Simulation Reference to Concept in Reading Describe the firm's cash

conversion cycle: Cash inflow "Most firms keep track of the average time it takes

customers to pay their bills. From this they can forecast what proportion of a quarter's

sales is likely to be converted into cash in that quarter and what proportion is likely to

be carried over to the next quarter as accounts receivable" (Allen, Brealey, & Myers

2005). Lawrence having a positive cash balance would have help in the event of

emergencies as well as unplanned outflow of money. Cash flow comes from

collections on accounts receivable (Allen, Brealey, & Myers 2005). Examine the

effects of credit policy on cash conversion cycle and revenue: Commitment Lawrence

had a commitment to the bank, Mayo, Murray, and Gartner.

According to Carole Howorth and Paul Westhead March 2003:-

Working capital management routines of a large random sample of small companies

in the UK are examined. Considerable variability in the take-up of 11 working capital

management routines was detected. Principal components analysis and cluster analysis

confirm the identification of four distinct ‘types’ of companies with regard to patterns

of working capital management. The first three ‘types’ of companies focused upon

cash management, stock or debtors routines respectively, whilst the fourth ‘type’ were

less likely to take-up any working capital management routines. Influences on the

amount and focus of working capital management are discussed. Multinomial logistic

regression analysis suggests that the selected independent variables successfully

discriminated between the four ‘types’ of companies. The results suggest that small

companies focus only on areas of working capital management where they expect to

improve marginal returns. The difficulties of establishing causality are highlighted and

implications for academics, policy-makers and practitioners are reported.

According to Maynard E. Rafuse, (1996):-

Argues 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

39

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.

According to James A. Gentry, Dileep R. Mehta:-

Working capital literature is rather limited and the process of managing shortterm

resources is not understood well by academicians. In contrast, corporate managers are

continuously involved in the working capital decision-making process, but their

perspective is limited to the practices within their firm. In order to fill this gap in the

working capital literature, a study of management perceptions of the working capital

process was undertaken. A survey was used to collect information from a sample of

marketing, production, and financial executives in large corporations in Belgium,

France, India, and the United States. The study interprets management ranking of

working capital objectives and indicates the need to improve financial planning

models to include explicitly short-run objectives; further, predictability of cash

inflows and outflows is examined and the potential factors affecting predictability are

evaluated. Finally, this study examines management perceptions of long-range

objectives in order to provide a proper perspective to the shortrun financial planning.

According to M.K. Kolay:-

The article analyses the “pros” and “cons” of different strategies to be adopted to

manage and avoid working capital crisis situations in any organisation. The working

capital position depends on many organisational parameters which are interrelated and

interdependent, and also vary over time. In such a situation, the use of a system

dynamics approach has been advocated to reflect the relevant dynamic cause-and-

effect relationships for the development of appropriate long-term and short-term

strategies.

According to Wang Zhuquan et al 2007:-

Working capital management is the main contents of corporate finance, so the study in

this field should gain much attention. Compared with the rapidly development of the

practice, the development of the theory has been lagged obviously since 1990's.We

40

suggest that the study should begin from the reclassification of working capital, and

then, the new framework of the theory should be set up, which is based on the supply-

chain management, the channel management and the customer relationship

management. Meanwhile, we should launch on the survey of working capital

management of Chinese companies and promulgate the results, which can offer the

data for the study and evaluation of working capital management.

According to James A. Gentry, Paul Newbold, David T. Whitford, (1984)

The objectives of this study are to offer cash based funds flow components as an

alternative to financial ratios for classifying the financial performance of companies;

to test empirically the ability of funds flow components to distinguish between failed

and no failed companies with special emphasis on working capital components; to

analyze the empirical results and make recommendations for future study.

According to Jeffrey Ashe 2000:-

Working Capital is the United States' largest peer-group lending program. This article

reviews what Working Capital has learned about the market, its customers, program

impact, and service delivery over its ten year history. It presents a model for

understanding how participating in peer lending groups develops “social and

economic capital” in poor communities. The article then discusses how participants

judge the group model as they identify the characteristics of successful groups and the

impact of the group on their businesses, on themselves personally, and on the larger

community. The rest of the article discusses how Working Capital evolved from a

start-up operation in a single town into a multistate program and explores the

advantages and limitations of rapid expansion. A checklist for choosing affiliate

partners is presented, along with a list of the lessons learned about delivering services

though affiliates.

According to Alan P. Hamlin, David F. Heathfield 2000:-

Working capital is a necessary input to the production process and yet is ignored in

most economic models of production. The implications of modeling the time

dimension of production, and hence the working capital requirements of firms, are

41

explored, with particular stress placed on the competitive advantage gained by firms

that retain flexibility in the time structure of their production.

According to VELLANKI S.S. KUMAR, AWAD S. HANNA, TERESA ADAMS, (2000):-

The systematic assessment of working capital requirement in construction projects

deals with the analysis of various quantitative and qualitative factors in which

information is subjective and based on uncertainty. There exists an inherent difficulty

in the classical approach to evaluate the impact of qualitative factors for the

assessment of working capital requirement. This paper presents a methodology to

incorporate linguistic variables into workable mathematical propositions for the

assessment of working capital using fuzzy set theory. This article takes into

consideration the uncertainty associated with many of the project resource variables

and these are reflected satisfactorily in the working capital computations. A case study

illustrates the application of the fuzzy set approach. The results of the case study

demonstrate the superiority of the fuzzy set approach to classical methods in the

assessment of realistic working capital requirements for construction projects.

According to Richard Petty, James Guthrie, (2000):-

The rise of the “new economy”, one principally driven by information and knowledge,

is attributed to the increased prominence of intellectual capital (IC) as a business and

research topic. Intellectual capital is implicated in recent economic, managerial,

technological, and sociological developments in a manner previously unknown and

largely unforeseen. Whether these developments are viewed through the filter of the

information society, the knowledge-based economy, the network society, or

innovation, there is much to support the assertion that IC is instrumental in the

determination of enterprise value and national economic performance. First, we seek

to review some of the most significant extant literature on intellectual capital and its

developed path. The emphasis is on important theoretical and empirical contributions

relating to the measurement and reporting of intellectual capital. The second part of

this paper identifies possible future research issues into the nature, impact and value of

intellectual management and reporting.

42

According to Sushma Vishnani, FCA, and Finance Faculty:-

It is felt that there is the need to study the role of working capital management policies

on profitability of a company. Conventionally, it has been seen that if a company

desires to take a greater risk for bigger profits and losses, it reduces the size of its

working capital in relation to its sales. If it is interested in improving its liquidity, it

increases the level of its working capital. However, this policy is likely to result in a

reduction of the sales volume, therefore of profitability. Hence, a company should

strike a balance between liquidity and profitability. In this paper an effort has been

made to make an empirical study of Indian Consumer Electronics Industry for

assessing the impact of working capital policies & practices on profitability during the

period 1994–95 to 2004–05. The impact of working capital policies on profitability

has been examined by computing coefficient of correlation and regression analysis

between profitability ratio and some key working capital policy indicator ratios.

According to Charles O. Egbu, (2004):-

Innovation is viewed as a major source of competitive advantage and is perceived to

be a pre-requisite for organizational success and survival. The ability to innovate

depends largely on the way in which an organisation uses and exploits the resources

available to it. The paper explores the importance of knowledge management (KM)

and intellectual capital (IC) in organisations. It also considers the critical factors that

lead to successful innovations and the role of KM and IC in this regard. The paper

argues that effective management of knowledge assets involves a holistic approach to

a host of factors. It is also suggested that there are a host of factors that combine in

different ways to produce successful organizational innovations. It recommends that

more is needed on the education and training of construction personnel and that these

education and training programmes should reflect the nature of innovation and KM

dimensions as very complex social processes.

According to Kenneth A. Froot and Jeremy C. Stein in 1998:-

We develop a framework for analyzing the capital allocation and capital structure

decisions facing financial institutions. Our model incorporates two key features: (i)

value-maximizing banks have a well-founded concern with risk management; and (ii)

43

not all the risks they face can be frictionlessly hedged in the capital market. This

approach allows us to show how bank-level risk management considerations should

factor into the pricing of those risks that cannot be easily hedged. We examine several

applications, including: the evaluation of proprietary trading operations, and the

pricing of unhedgeable derivatives positions. We also compare our approach to the

RAROC methodology that has been adopted by a number of banks.

According to Pradeep Singh (2008):-

Empirically analysed that a firm’s working capital consists of its investments in

current assets, which includes short-term assets—cash and bank balance, inventories,

receivable and marketable securities. Therefore, the working capital management

refers to the management of the levels of all these individual current assets. On the

other hand, inventory, which is one of the important elements of current assets,

reflects the investment of a firm’s fund. Hence, it is necessary to efficiently manage

inventories in order to avoid unnecessary investments. A firm, which neglects the

management of inventories, will have to face serious problems relating to long-term

profitability and may fail to survive. With the help of better inventory management, a

firm can reduce the levels of inventories to a considerable degree. ‘This paper tries to

evaluate the effect of the size of inventory and the impact on working capital through

inventory ratios, working capital ratios, trends, computation of inventory and working

capital, and liquidity ranking. Finally, it was found that the size of inventory directly

affects working capital and it's management. Size of the inventory and working capital

of Indian Farmers Fertilizer Cooperative Limited (IFFCO) is properly managed and

controlled compared to National Fertilizer Ltd. (NFL).

According to Pedro Juan Garcı´a-Teruel and Pedro Martı´nez-Solano (2007):-

Conducted research for the object of the research presented in this paper is to provide

empirical evidence on the effects of working capital management on the profitability

of a sample of small and medium-sized Spanish firms. The results, which are robust to

the presence of endogeneity, demonstrate that managers can 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.

44

The aim is to ensure that the relationships found in the analysis carried out are due to

the effects of the cash conversion cycle on corporate profitability and not vice versa.

According to Naila Iqbal (2001):-

Examined that for increasing shareholder's wealth a firm has to analyze the effect of

fixed assets and current assets on its return and risk. Working Capital Management is

related with the Management of current assets. The Management of current assets is

different from fixed assets on the basis of the following points i.e Current assets are

for short period while fixed assets are for more than one Year.The large holdings of

current assets, especially cash, strengthens Liquidity position but also reduces overall

profitability, and to maintain an optimum level of liquidity and profitability, risk

return trade off is involved holding Current assets.Only Current Assets can be

adjusted with sales fluctuating in the short run. Thus, the firm has greater degree of

flexibility in managing current Assets. The management of Current Assets helps

affirm in building a good market reputation regarding its business and economic

condition.

According to Vellanki S. Kumar, Awad S.Hanna, Teresa Adams (2000):-

Conducted research and examined that the systematic assessment of working capital

requirement in construction projects deals with the analysis of various quantitative and

qualitative factors in which information is subjective and based on uncertainty. There

exists an inherent difficulty in the classical approach to evaluate the impact of

qualitative factors for the assessment of working capital requirement. This paper

presents a methodology to incorporate linguistic variables into workable mathematical

propositions for the assessment of working capital using fuzzy set theory. This article

takes into consideration the uncertainty associated with many of the project resource

variables and these are reflected satisfactorily in the working capital computations. A

case study illustrates the application of the fuzzy set approach. The results of the case

study demonstrate the superiority of the fuzzy set approach to classical methods in the

assessment of realistic working capital requirements for construction projects.

45

According to Maynard E. Rafuse (1996):-

Argues 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.

46

CHAPTER – 3

OBJECTIVES OF THE STUDY

Fixing the objective is like identifying the star. The objective decides where we want

to go, what we want to achieve and what is our goal or destination.

Every study is carried out for the achievement of certain objectives.

i. To analyze the various components of working capital of L&T.

ii. To study the financing of working capital of L&T.

iii. To study and analyze the operating cycle of L&T.

47

CHAPTER – 4

RESEARCH METHODOLOGY

DATA COLLECTION METHODS:

The data will be collected using both by primary data collection methods as well as

secondary sources.

• PRIMARY DATA : Most of the information will be gathered through primary

sources. The methods that will be used to collect primary data are:

a) Questionnaire

b) Interview

• SECONDARY DATA : Secondary data that will be used are web sites and

published materials related to working capital management as well as any relevant

information on capital of the company at Heston Kuwait.

• SAMPLE SIZE : 50-75

48

[

CHAPTER – 5

DATA ANALYSIS

Balance Sheet of Larsen and Toubro

------------------- in Rs. Cr. -------------------

Mar '06 Mar '07 Mar '08 Mar '09 Mar '10

12 mths 12 mths 12 mths 12 mths 12 mths

Sources Of FundsTotal Share Capital 27.48 56.65 58.47 117.14 120.44Equity Share Capital 27.48 56.65 58.47 117.14 120.44Share Application Money 0.00 0.00 0.00 0.00 25.09Preference Share Capital 0.00 0.00 0.00 0.00 0.00

Reserves4,583.3

25,683.85 9,470.71 12,317.96

18,142.82

Revaluation Reserves 29.37 27.93 25.90 24.59 23.29

Networth4,640.1

75,768.43 9,555.08 12,459.69

18,311.64

Secured Loans 465.79 245.40 308.53 1,102.38 955.73Unsecured Loans 987.78 1,832.35 3,275.46 5,453.65 5,845.10

Total Debt1,453.5

72,077.75 3,583.99 6,556.03 6,800.83

Total Liabilities6,093.7

47,846.18 13,139.07 19,015.72

25,112.47



Application Of Funds

Gross Block2,300.6

82,876.30 4,188.91 5,575.00 7,235.78

Less: Accum. Depreciation 982.22 1,122.83 1,242.47 1,421.39 1,727.68

Net Block1,318.4

61,753.47 2,946.44 4,153.61 5,508.10

Capital Work in Progress 286.06 471.22 699.00 1,040.99 857.66

Investments1,919.5

23,104.44 6,922.26 8,263.72

13,705.35

Inventories2,210.2

73,001.14 4,305.91 5,805.05 1,415.37

49

Sundry Debtors4,814.1

65,504.64 7,365.01 10,055.52

11,163.70

Cash and Bank Balance 398.71 993.68 779.86 693.13 1,104.89

Total Current Assets7,423.1

49,499.46 12,450.78 16,553.70

13,683.96

Loans and Advances2,061.5

02,449.14 3,861.10 7,198.85

12,662.55

Fixed Deposits 184.49 100.75 184.60 82.16 326.98Total CA, Loans & Advances

9,669.13

12,049.35 16,496.48 23,834.7126,673.4

9Deffered Credit 0.00 0.00 0.00 0.00 0.00

Current Liabilities6,106.0

48,362.01 11,892.75 15,211.04

19,443.77

Provisions1,015.3

71,180.13 2,035.42 3,066.53 2,188.36

Total CL & Provisions7,121.4

19,542.14 13,928.17 18,277.57

21,632.13

Net Current Assets2,547.7

22,507.21 2,568.31 5,557.14 5,041.36

Miscellaneous Expenses 21.98 9.84 3.06 0.26 0.00

Total Assets6,093.7

47,846.18 13,139.07 19,015.72

25,112.47

Contingent Liabilities 305.59 270.22 1,013.51 1,371.86 1,719.39Book Value (Rs) 335.61 202.65 325.98 212.32 303.28

PROFIT AND LOSS ACCOUNTS:

Larsen and ToubroProfit & Loss account ------------------- in Rs. Cr. -------------------



Income

Sales Turnover 15,030.81 17,983.37 25,280.49 34,249.85 37,187.50

Excise Duty 253.86 338.08 334.38 393.31 317.31

Net Sales 14,776.95 17,645.29 24,946.11 33,856.54 36,870.19

Other Income 527.52 459.80 616.69 1,612.58 2,321.67

Stock Adjustments -103.24 121.76 746.17 105.11 -422.99

Total Income 15,201.23 18,226.85 26,308.97 35,574.23 38,768.87

Expenditure

Raw Materials 4,510.78 5,320.98 8,256.46 9,316.38 9,593.53

50

Power & Fuel Cost 221.50 308.13 365.25 456.39 334.08

Employee Cost 890.03 1,258.21 1,535.44 1,998.02 2,379.14

Other Manufacturing Expenses

6,647.70 7,451.07 10,632.83 15,659.17 16,913.31

Selling and Admin Expenses 996.59 1,222.80 1,393.80 1,844.83 1,854.23

Miscellaneous Expenses 125.00 166.15 280.69 569.32 325.58

Preoperative Exp Capitalised -1.89 -3.30 -11.42 -24.48 -36.25

Total Expenses 13,389.71 15,724.04 22,453.05 29,819.63 31,363.62



Operating Profit 1,284.00 2,043.01 3,239.23 4,142.02 5,083.58

PBDIT 1,811.52 2,502.81 3,855.92 5,754.60 7,405.25

Interest 321.34 331.46 501.83 770.00 995.37

PBDT 1,490.18 2,171.35 3,354.09 4,984.60 6,409.88

Depreciation 107.12 160.13 195.94 284.83 383.65

Other Written Off 0.00 0.00 15.66 21.16 30.95

Profit Before Tax 1,383.06 2,011.22 3,142.49 4,678.61 5,995.28

Extra-ordinary items -1.85 -5.34 12.21 -21.09 -45.13

PBT (Post Extra-ord Items) 1,381.21 2,005.88 3,154.70 4,657.52 5,950.15

Tax 366.12 601.87 982.05 1,176.19 1,577.02

Reported Net Profit 1,012.14 1,403.02 2,173.42 3,481.66 4,375.52

Total Value Addition 8,878.93 10,403.06 14,196.59 20,503.25 21,770.09

Preference Dividend 0.00 0.00 0.00 0.00 0.00

Equity Dividend 302.25 368.25 495.32 614.97 752.75

Corporate Dividend Tax 42.39 53.34 76.26 101.83 110.25

Per share data (annualised)

Shares in issue (lakhs) 1,373.86 2,832.71 2,923.27 5,856.88 6,021.95

Earnings Per Share (Rs) 73.67 49.53 74.35 59.45 72.66

Equity Dividend (%) 1,100.00 650.00 850.00 525.00 625.00

Book Value (Rs) 335.61 202.65 325.98 212.32 303.28

51

CASH FLOW:

Larsen and ToubroCash Flow ------------------- in Rs. Cr. ------------------- Mar '06 Mar '07 Mar '08 Mar '09 Mar '10


Net Profit Before Tax 1383.40 2004.89 3155.47 3940.41 5880.67

Net Cash From Operating Activities

1369.25 2130.45 1945.24 1478.57 5482.75

Net Cash (used in)/fromInvesting Activities

-1326.30 -1588.17 -5241.89 -3308.53 -6071.73

Net Cash (used in)/from Financing Activities

-287.77 -31.05 3166.68 1640.79 1245.56

Net (decrease)/increase In Cash and Cash Equivalents

-244.82 511.23 -129.97 -189.17 656.58

Opening Cash & Cash Equivalents

828.02 583.20 1094.43 964.46 775.29

Closing Cash & Cash Equivalents

583.20 1094.43 964.46 775.29 1431.87

QUARTERLY RESULTS:

Larsen and ToubroQuarterly Results ------------------- in Rs. Cr. -------------------

Mar '10 Jun '10 Sep '10 Dec '10 Mar '11

Sales Turnover 13,585.10 7,885.31 9,330.76 11,413.08 15,384.21

Other Income 329.84 226.76 382.19 247.18 369.82

Total Income 13,914.94 8,112.07 9,712.95 11,660.26 15,754.03

Total Expenses 11,534.34 6,878.26 8,325.08 10,175.19 13,042.35


Profit On Sale Of Assets -- -- -- -- --

Profit On Sale Of Investments

-- -- -- -- --

Gain/Loss On Foreign Exchange

-- -- -- -- --

VRS Adjustment -- -- -- -- --

Other Extraordinary Income/Expenses

-- -- -- -- --

52

Total Extraordinary Income/Expenses

100.69 -- 70.84 35.30 225.77

Tax On Extraordinary Items -- -- -- -- --

Net Extra Ordinary Income/Expenses

-- -- -- -- --

Gross Profit 2,380.60 1,233.81 1,387.87 1,485.07 2,711.68

Interest 135.56 142.34 193.15 175.71 136.17

PBDT 2,345.73 1,091.47 1,265.56 1,344.66 2,801.28

Depreciation 116.22 114.15 121.21 128.09 235.77

Depreciation On Revaluation Of Assets

-- -- -- -- --

PBT 2,229.51 977.32 1,144.35 1,216.57 2,565.51

Tax 791.41 311.15 379.37 376.04 879.30

Net Profit 1,438.10 666.17 764.98 840.53 1,686.21

Prior Years Income/Expenses

-- -- -- -- --

Depreciation for Previous Years Written Back/ Provided

-- -- -- -- --

Dividend -- -- -- -- --

Dividend Tax -- -- -- -- --

Dividend (%) -- -- -- -- --

Earnings Per Share 23.88 11.04 12.65 13.83 27.69

Book Value -- -- -- -- --

Equity 120.44 120.63 120.99 121.56 121.77

Reserves -- -- -- -- --

Face Value 2.00 2.00 2.00 2.00 2.00

53

HALF YEARLY RESULTS:

Larsen and ToubroHalf Yearly Results ------------------- in Rs. Cr. -------------------

Sep '08 Sep '09 Mar '10 Sep '10 Mar '11


Sales Turnover 14,591.24 15,327.13 21,707.67 17,212.22 26,797.29

Other Income 336.57 440.34 469.91 597.29 617.00

Total Income 14,927.81 15,767.47 22,177.58 17,809.51 27,414.29

Total Expenses 13,235.88 13,658.01 18,561.24 15,187.83 23,217.54




-- -- -- -- --


-- -- -- -- --



-- -- -- -- --


-- 1,047.26 163.24 70.84 261.07



-- -- -- -- --

Gross Profit 1,691.93 2,109.46 3,616.34 2,621.68 4,196.75

Interest 107.24 240.55 264.76 335.49 311.88

PBDT 1584.69 2916.17 3514.82 2357.03 4145.94

Depreciation 138.93 193.86 220.74 235.36 363.86


-- -- -- -- --

PBT 1445.76 2722.31 3294.08 2121.67 3782.08

Tax 483.06 543.71 1,097.16 690.52 1,255.34

Net Profit 962.70 2,178.60 2,196.92 1,431.15 2,526.74

Prior Year Income/Expenses -- -- -- -- --


-- -- -- -- --

Dividend -- -- -- -- --


Dividend (%) -- -- -- -- --

Earnings Per Share(Rs) 32.90 37.07 36.48 23.66 41.50

54

Book Value(Rs) -- -- -- -- --

Equity 58.52 117.53 120.44 120.99 121.77

Reserves -- -- 18,142.82 -- 21,702.36

Face Value(Rs) 2.00 2.00 2.00 2.00 2.00

NINE MONTHLY RESULT:

Larsen and Toubro

Nine Months ------------------- in Rs. Cr. -------------------

Dec '06 Dec '07 Dec '08 Dec '09 Dec '10

Sales Turnover 11,330.60 16,387.83 23,208.03 23,448.28 28,617.53

Other Income 258.15 335.67 639.99 661.07 840.53

Total Income 11,588.75 16,723.50 23,848.02 24,109.35 29,458.06

Total Expenses 10,393.90 14,688.18 21,069.06 20,764.15 25,351.31

Operating Profit 936.70 1,699.65 2,138.97 2,684.13 3,266.22



-- -- -- -- --


-- -- -- -- --



-- -- -- -- --


-- -- 916.33 1,109.81 106.14



-- -- -- -- --

Gross Profit 1,194.85 2,035.32 2,778.96 3,345.20 4,106.75

Interest 27.60 72.80 204.77 369.75 511.20

PBDT 1,167.25 1,962.52 3,490.52 4,085.26 3,701.69

Depreciation 100.20 143.43 217.05 298.38 363.45


-- -- -- -- --

PBT 1,067.05 1,819.09 3,273.47 3,786.88 3,338.24

Tax 364.80 612.43 790.33 849.46 1,066.56

Net Profit 702.25 1,206.66 2,483.14 2,937.42 2,271.68

Prior Years Income/Expenses -- -- -- -- --

Depreciation for Previous -- -- -- -- --

55

Years Written Back/ Provided

Dividend -- -- -- -- --


Dividend (%) -- -- -- -- --


Book Value -- -- -- -- --

Equity 56.11 58.37 117.07 120.05 121.56

Reserves -- -- -- -- --

Face Value 2.00 2.00 2.00 2.00 2.00

YEARLY RESULTS:

Larsen and Toubro

Yearly Results ------------------- in Rs. Cr. -------------------


Sales Turnover 17,578.84 24,854.70 33,926.37 37,034.80 43,904.91

Other Income 462.29 587.87 739.78 910.25 1,194.85

Total Income 18,041.13 25,442.57 34,666.15 37,945.05 45,099.76

Total Expenses 15,832.30 22,040.07 30,069.53 32,219.25 38,282.33




-- -- -- -- --


-- -- -- -- --



-- -- -- -- --


-- 87.23 772.46 1,210.50 332.91



-- -- -- -- --

Gross Profit 2,208.83 3,402.50 4,596.62 5,725.80 6,817.43

Interest 33.93 122.66 350.22 505.31 647.37

PBDT 2,174.90 3,367.07 5,018.86 6,430.99 6,502.97

56

Depreciation 170.01 211.60 305.99 414.60 599.22


-- -- -- -- --

PBT 2,004.89 3,155.47 4,712.87 6,016.39 5,903.75

Tax 601.87 982.05 1,231.21 1,640.87 1,945.86

Net Profit 1,403.02 2,173.42 3,481.66 4,375.52 3,957.89

Prior Years Income/Expenses -- -- -- -- --


-- -- -- -- --

Dividend -- -- -- -- --


Dividend (%) -- -- -- -- --


Book Value -- -- -- -- --

Equity 56.65 58.47 117.14 120.44 121.77

Reserves 5,683.85 9,470.71 12,317.96 18,142.82 21,702.36

Face Value 2.00 2.00 2.00 2.00 2.00

CAPITAL STRUCTURE:

Larsen and Toubro

Capital Structure

Period Instrument --- CAPITAL (Rs. cr) --- - P A I D U P -

From To Authorised Issued Shares (nos) Face Value Capital

2009 2010 Equity Share 214.75 120.44 602195408 2 120.44

2008 2009 Equity Share 214.75 117.14 585687862 2 117.14

2007 2008 Equity Share 214.75 58.47 292327390 2 58.47

57

2006 2007 Equity Share 214.75 56.65 283270748 2 56.65

2005 2006 Equity Share 214.75 27.48 137385777 2 27.48

2004 2005 Equity Share 214.75 25.98 129924182 2 25.98

2003 2004 Equity Share 214.75 24.88 124401796 2 24.88

2002 2003 Equity Share 214.75 214.75 248668756 10 214.75

2001 2002 Equity Share 214.75 214.75 248660346 10 214.75

2000 2001 Equity Share 214.75 214.75 248650346 10 214.75

1999 2000 Equity Share 214.75 214.75 248545098 10 214.75

1998 1999 Equity Share 214.75 214.75 248516393 10 214.75

1997 1998 Equity Share 214.75 214.75 248502885 10 214.75

1996 1997 Equity Share 214.75 214.75 248488155 10 214.75

1995 1996 Equity Share 214.75 214.75 248472703 10 214.75

1994 1995 Equity Share 214.75 214.75 228798916 10 214.75

1993 1994 Equity Share 214.75 213.24 211481630 10 211.48

1992 1993 Equity Share 214.75 213.24 209943247 10 209.94

1991 1992 Equity Share 214.75 129.61 129613652 10 129.61

1990 1991 Equity Share 115 75.42 75419968 10 75.42

1989 1990 Equity Share 80 68.08 68084408 10 68.08

1987 1989 Equity Share 74.98 60.75 60748844 10 60.75

1986 1987 Equity Share 74.98 51.99 51993354 10 51.99

1985 1986 Equity Share 74.98 51.99 51993354 10 51.99

1984 1985 Equity Share 38.83 32.5 27079675 10 27.08

1982 1984 Equity Share 38.83 24.02 24019714 10 24.02

1981 1982 Equity Share 28.83 23.07 23065344 10 23.07

1979 1981 Equity Share 18.83 14.42 14415840 10 14.42

1978 1979 Equity Share 13.83 11.53 11532672 10 11.53

1975 1978 Equity Share 8.5 7.45 7453395 10 7.45

1973 1975 Equity Share 8.5 5.96 5962716 10 5.96

1972 1973 Equity Share 8.5 4.52 4517209 10 4.52

1969 1972 Equity Share 4.8 3.99 3993000 10 3.99

1967 1969 Equity Share 4.8 3.63 3630000 10 3.63

1964 1967 Equity Share 2.8 2.64 2640000 10 2.64

1962 1964 Equity Share 1.8 1.65 1650000 10 1.65

1960 1962 Equity Share 1.8 1.1 1100000 10 1.1

1959 1960 Equity Share 1.8 0.8 800000 10 0.8

1958 1959 Equity Share 0.8 0.6 600000 10 0.6

1957 1958 Equity Share 0.8 0.5 500000 10 0.5

1956 1957 Equity Share 0.8 0.55 450000 10 0.45

1955 1956 Equity Share 0.8 0.4 400000 10 0.4

1954 1955 Equity Share 0.8 0.35 350000 10 0.35

1950 1954 Equity Share 0.8 0.32 320000 10 0.32

58

1946 1950 Equity Share 0.8 0.19 185000 10 0.19

FINANCIAL RATIOS:

Larsen and ToubroKey Financial Ratios ------------------- in Rs. Cr. -------------------


Investment Valuation Ratios

Face Value 2.00 2.00 2.00 2.00 2.00

Dividend Per Share 22.00 13.00 17.00 10.50 12.50

Operating Profit Per Share (Rs)

92.92 71.77 110.81 70.72 84.42

Net Operating Profit Per Share (Rs)

1,075.58 622.91 853.36 578.06 612.26

Free Reserves Per Share (Rs) 324.46 197.15 319.09 205.21 294.74

Bonus in Equity Capital 12.40 55.44 53.71 76.77 74.67

Profitability Ratios

Operating Profit Margin(%) 8.63 11.52 12.98 12.23 13.78

Profit Before Interest And Tax Margin(%)

7.73 10.34 11.97 11.14 12.41

Gross Profit Margin(%) 9.82 13.24 12.19 11.39 12.74

Cash Profit Margin(%) 7.40 8.63 8.78 8.50 9.21

Adjusted Cash Margin(%) 6.14 8.60 8.78 8.50 9.21

Net Profit Margin(%) 6.69 7.74 8.54 10.06 11.56

Adjusted Net Profit Margin(%)

5.43 7.72 8.54 10.06 11.56

Return On Capital Employed(%)

24.88 29.82 26.72 24.14 22.49

Return On Net Worth(%) 21.95 24.44 22.81 27.99 23.95

Adjusted Return on Net Worth(%)

17.90 24.39 21.21 21.21 16.81

Return on Assets Excluding Revaluations

7.66 202.30 325.87 212.31 303.28

Return on Assets Including Revaluations

7.68 203.29 326.76 212.73 303.66

Return on Long Term Funds(%)

26.15 32.59 28.73 25.62 23.19

Liquidity And Solvency Ratios

Current Ratio 1.28 1.16 1.09 1.22 1.19

Quick Ratio 1.03 0.93 0.86 0.97 1.15

Debt Equity Ratio 0.32 0.36 0.38 0.53 0.37

59

Long Term Debt Equity Ratio

0.25 0.25 0.28 0.44 0.33

Debt Coverage Ratios

Interest Cover 11.56 25.07 28.57 13.09 11.17

Total Debt to Owners Fund 0.32 0.36 0.38 0.53 0.37

Financial Charges Coverage Ratio

5.03 7.52 7.41 6.35 6.09

Financial Charges Coverage Ratio Post Tax

4.48 5.72 5.75 5.92 5.81

Management Efficiency Ratios

Inventory Turnover Ratio 6.84 6.03 6.00 6.01 28.73

Debtors Turnover Ratio 3.37 3.42 3.88 3.89 3.48

Investments Turnover Ratio 6.95 6.11 6.00 6.01 28.73

Fixed Assets Turnover Ratio 11.45 9.52 6.09 6.23 5.20

Total Assets Turnover Ratio 2.45 2.27 1.92 1.80 1.48

Asset Turnover Ratio 6.50 6.21 6.09 6.23 5.20

Average Raw Material Holding

33.67 34.05 34.14 38.11 32.32

Average Finished Goods Held

4.93 5.56 5.21 4.02 3.54

Number of Days In Working Capital

62.07 51.15 37.06 59.09 49.22

Profit & Loss Account Ratios

Material Cost Composition 30.52 30.15 33.09 27.51 26.01

Imported Composition of Raw Materials Consumed

45.81 49.28 39.78 44.34 54.43

Selling Distribution Cost Composition

1.06 1.13 1.28 0.92 0.83

Expenses as Composition of Total Sales

21.50 21.36 22.67 21.70 18.62

Cash Flow Indicator Ratios

Dividend Payout Ratio Net Profit

34.05 30.04 26.29 20.58 19.72

Dividend Payout Ratio Cash Profit

30.79 26.97 23.96 18.92 18.01

Earning Retention Ratio 58.05 69.85 71.72 72.84 71.91

Cash Earning Retention Ratio

62.89 72.95 74.40 75.66 75.25

AdjustedCash Flow Times 1.57 1.33 1.61 2.23 1.95



60

Book Value 335.61 202.65 325.98 212.32 303.28

61

MARKET CAPITALISATION:

Company Name Last Price % Chg52 wkHigh

52 wkLow

Market Cap(Rs. cr)

Larsen 1,722.00 1.27 2,212.00 1,475.00 104,664.02BHEL 1,933.20 0.91 2,695.00 1,890.10 94,634.01Suzlon Energy 52.75 1.05 66.30 42.80 9,375.52BGR Energy 493.05 2.28 871.00 402.10 3,556.58AIA Engineering 368.55 0.97 479.90 305.00 3,476.18Alfa Laval 1,487.95 2.26 1,806.00 1,114.00 2,702.19BEML 599.40 -0.21 1,238.00 565.00 2,496.17Praj Industries 74.00 -0.20 88.90 61.45 1,367.36Tecpro Systems 264.10 -1.29 454.25 225.10 1,333.01Elecon Eng 69.85 0.58 103.70 59.30 648.64CMI FPE 1,286.80 -0.25 1,632.00 1,275.00 635.40Shriram EPC 136.00 0.22 313.80 123.00 601.97Sanghvi Movers 118.50 0.04 210.05 103.65 512.96Walchandnagar 122.90 0.33 248.40 103.00 467.88TIL 434.45 -0.16 750.05 424.00 435.76TRF 388.75 -0.47 970.00 382.00 427.80Action Const 46.05 -0.22 75.20 37.35 427.74Disa India 1,511.70 0.11 1,980.00 1,270.00 228.30Gujarat Apollo 133.90 -0.52 246.95 124.00 221.94Kabra Extrusion 54.40 -1.27 103.25 54.15 173.55GMM Pfaudler 106.80 6.80 129.90 86.00 156.11Eimco Elecon 237.00 2.16 398.00 213.00 136.71UB Engineering 80.05 0.00 239.40 73.50 136.62Kilburn Eng 65.05 3.25 89.50 58.20 86.23Windsor 52.80 -0.09 107.35 46.00 68.83Int Combustion 252.80 -0.30 421.00 212.50 60.43Josts Engineers 455.00 4.78 517.95 295.00 34.79Skyline Millars 6.03 3.79 12.50 4.26 24.26ATV Projects 3.80 0.00 11.90 3.30 20.18Cranex 11.09 -3.40 12.10 3.41 6.65Sterling Strips 7.60 0.00 14.98 5.95 3.11

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NET SALES:

Company Name Last Price Change % Change Net Sales(Rs. cr)

Larsen 1,722.00 21.55 1.27 36,870.19BHEL 1,933.20 17.45 0.91 33,226.25Suzlon Energy 52.75 0.55 1.05 3,504.34BGR Energy 493.05 11.00 2.28 3,069.25BEML 599.40 -1.25 -0.21 2,855.84Tecpro Systems 264.10 -3.45 -1.29 1,454.93Shriram EPC 136.00 0.30 0.22 1,114.57Elecon Eng 69.85 0.40 0.58 1,045.10Alfa Laval 1,487.95 32.90 2.26 837.55TIL 434.45 -0.70 -0.16 832.71AIA Engineering 368.55 3.55 0.97 803.98TRF 388.75 -1.85 -0.47 649.95Praj Industries 74.00 -0.15 -0.20 602.28UB Engineering 80.05 0.00 0.00 526.80Action Const 46.05 -0.10 -0.22 429.64CMI FPE 1,286.80 -3.20 -0.25 387.90Sanghvi Movers 118.50 0.05 0.04 331.53Windsor 52.80 -0.05 -0.09 209.15Gujarat Apollo 133.90 -0.70 -0.52 201.69Kabra Extrusion 54.40 -0.70 -1.27 194.81Eimco Elecon 237.00 5.00 2.16 162.31GMM Pfaudler 106.80 6.80 6.80 154.48Disa India 1,511.70 1.70 0.11 107.87Int Combustion 252.80 -0.75 -0.30 96.99Kilburn Eng 65.05 2.05 3.25 88.36Josts Engineers 455.00 20.75 4.78 77.79ATV Projects 3.80 0.00 0.00 24.50Skyline Millars 6.03 0.22 3.79 22.66Cranex 11.09 -0.39 -3.40 18.52Sterling Strips 7.60 0.00 0.00 7.25

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NET PROFIT:

Company Name Last Price Change % Change Net Profit(Rs. cr)

Larsen 1,722.00 21.55 1.27 4,375.52BHEL 1,933.20 17.45 0.91 4,310.64BEML 599.40 -1.25 -0.21 222.85BGR Energy 493.05 11.00 2.28 201.02AIA Engineering 368.55 3.55 0.97 122.56Praj Industries 74.00 -0.15 -0.20 113.89Tecpro Systems 264.10 -3.45 -1.29 110.07Alfa Laval 1,487.95 32.90 2.26 108.12Sanghvi Movers 118.50 0.05 0.04 90.42Elecon Eng 69.85 0.40 0.58 66.18TRF 388.75 -1.85 -0.47 47.18TIL 434.45 -0.70 -0.16 46.86Shriram EPC 136.00 0.30 0.22 44.66UB Engineering 80.05 0.00 0.00 30.68CMI FPE 1,286.80 -3.20 -0.25 27.29Gujarat Apollo 133.90 -0.70 -0.52 26.93Action Const 46.05 -0.10 -0.22 24.44Kabra Extrusion 54.40 -0.70 -1.27 21.46Disa India 1,511.70 1.70 0.11 15.10Windsor 52.80 -0.05 -0.09 13.16Eimco Elecon 237.00 5.00 2.16 12.80Int Combustion 252.80 -0.75 -0.30 11.96GMM Pfaudler 106.80 6.80 6.80 11.06ATV Projects 3.80 0.00 0.00 4.74Josts Engineers 455.00 20.75 4.78 4.40Kilburn Eng 65.05 2.05 3.25 4.31Skyline Millars 6.03 0.22 3.79 4.24Sterling Strips 7.60 0.00 0.00 0.72Cranex 11.09 -0.39 -3.40 -0.29Suzlon Energy 52.75 0.55 1.05 -1,414.09

TOTAL ASSETS:

Company Name Last Price % ChgGrossBlock

NetBlock

CWIPTotalAssets

Larsen 1,722.00 1.27 7,235.78 5,508.10 857.66 25,112.47BHEL 1,933.20 0.91 6,579.70 2,414.96 1,550.49 16,045.11Suzlon Energy 52.75 1.05 1,355.74 917.16 10.38 13,072.14BEML 599.40 -0.21 798.71 273.87 32.21 2,939.66BGR Energy 493.05 2.28 170.43 139.09 10.36 1,633.02Shriram EPC 136.00 0.22 163.28 141.70 0.01 1,052.32Sanghvi Movers 118.50 0.04 1,186.09 879.69 1.61 944.09Elecon Eng 69.85 0.58 509.42 344.34 17.88 847.68AIA Engineering 368.55 0.97 278.86 204.91 10.27 745.45

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Tecpro Systems 264.10 -1.29 136.73 113.63 11.01 633.26Praj Industries 74.00 -0.20 173.71 137.42 47.90 531.88Alfa Laval 1,487.95 2.26 189.38 96.49 11.65 422.23TRF 388.75 -0.47 55.80 27.47 1.74 315.69TIL 434.45 -0.16 191.29 109.01 19.54 295.54ATV Projects 3.80 0.00 397.07 228.54 0.00 240.69Action Const 46.05 -0.22 88.53 72.09 1.95 201.09Gujarat Apollo 133.90 -0.52 62.97 51.09 7.78 181.49UB Engineering 80.05 0.00 48.18 48.18 1.80 163.48Eimco Elecon 237.00 2.16 93.70 30.50 0.26 140.30CMI FPE 1,286.80 -0.25 73.92 28.23 0.09 107.81Kilburn Eng 65.05 3.25 20.53 16.31 2.97 107.30Kabra Extrusion 54.40 -1.27 62.13 39.29 8.49 95.53GMM Pfaudler 106.80 6.80 61.92 28.05 0.77 91.95Int Combustion 252.80 -0.30 47.73 19.08 0.13 74.19Disa India 1,511.70 0.11 35.00 12.17 1.01 55.59Skyline Millars 6.03 3.79 3.70 1.90 0.00 34.36Cranex 11.09 -3.40 3.01 1.26 0.00 13.61Josts Engineers 455.00 4.78 10.17 1.76 0.00 9.48Sterling Strips 7.60 0.00 3.93 1.41 2.03 4.00Windsor 52.80 -0.09 71.14 13.11 0.00 -15.85

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NET WORKING CAPITAL SIZE

Net Working Capital Size (Rs. In cr.)

Years 2005-06 2006-07 2007-08 2008-09 2009-10

Current Assets 9,484.64 11,948.60 16,311.88 23,752.55 26,346.51

Current Liabilities6,106.04 8,362.01 11,892.75 15,211.04 19,443.77

Net working capital

3378.6 3586.59 4419.13 8541.51 6902.74

Observations:-

It was observed that major source of liquidity problem is not the mismatch between

current payments and current receipts from the Comparison of funds flow statements

of AIL for five years. This company net working capital is continue increase and to

the present level is good. The growth in working capital is a clear indication that the

company does not utilizing its short term resources with efficiency. In year 2005-06

66

the company net working capital was 3378.6 and after 3 years it increasing and 2009-

10 the company net working capital was 6902.74

CURRENT ASSETS

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.

Current Assets Size (Rs. In Cr.)

Particulars 2005-06 2006-07 2007-08 2008-09 2009-10

Inventories 2,210.27 3,001.14 4,305.91 5,805.05 1,415.37

Sundry

Debtors 4,814.16 5,504.64 7,365.01 10,055.52 11,163.70

Cash and Bank

Balance 398.71 993.68 779.86 693.13 1,104.89

Loans and

Advances 2,061.50 2,449.14 3,861.10 7,198.85 12,662.55

Total 9,484.64 11,948.60 16,311.88 23,752.55 26,346.51

C.A. Indices 100 110 130 150 170

67

TOTAL CURRENT ASSETS:

Observations:-

It was observed that the size of current assets is increasing with increases in the sales.

The excess of current assets is showing positive liquidity position of the firm but it is

not always good because excess current assets then required, it may adversely affects

68

on profitability. Current assets include some funds investments for which company

pay interest.

CURRENT LIABILITIES

Current liabilities mean the liabilities which have to pay in current year. It includes

sundry creditor’s means supplier whose payment is due but not paid yet, thus creditors

called as current liabilities. Current liabilities also include short term loan and

provision as tax provision. Current liabilities also includes bank overdraft. For some

current assets like bank overdrafts and short term loan, company has to pay interest

thus the management of current liabilities has importance

Net Current Liabilities Size (Rs. In Cr.)

Particulars 2005-06 2006-07 2007-08 2008-09 2009-10Current

Liabilities6,106.04 8,362.01 11,892.75 15,211.04 19,443.77

Provisions 1,015.37 1,180.13 2,035.42 3,066.53 2,188.36Total of B 7,121.41 9,542.14 13,928.17 18,277.57 21,632.13

Indices of C.L. 100 110 125 138 145.5

69

70

Observations:-

Current liabilities show continues growth each year because company creates the

credit in the market by good transaction. To get maximum credit from supplier which

is profitable to the company it reduces the need of working capital of firm. As a

current liability increase in the year 2009-10 by 21,632.13. It increases the working

capital size in the same year. And company enjoyed over creditors which may include

indirect cost of credit terms.

CHANGES IN WORKING CAPITAL

There are so many reasons to changes in working capital as follow

1. Changes in sales and operating expanses

The changes in sales and operating expenses may be due to three reasons

• There may be long run trend of change e.g. The price of row material say oil

may constantly raise necessity the holding of large inventory.

• Cyclical changes in economy dealing to ups and downs in business activity

will influence the level of working capital both permanent and temporary.

• Changes in seasonality in sales activities

2. Policy changes

The second major case of changes in the level of working capital is because of policy

changes initiated by management. The term current assets policy may be defined as

the relationship between current assets and sales volume.

1. Technology changes

71

The third major point if changes in working our business more working capital is

required A change in operating expenses rise or full will have similar effects on the

levels of working following working capital statement is prepared capital are changes

in technology because changes in technology to install that technology in on the base

of balance sheet of last two year

Changes in Working Capital (Rs. In Cr.)

Statement of Changes in Working Capital

Particular 2008-09 2009-10 Changes in W.C

A)Current Assets Increase Decrease

Inventories5,805.05 1,415.37

4,389.68

Sundry Debtors10,055.52 11,163.70 1,108.18

Cash and Bank Balance693.13 1,104.89 411.76

Loans and Advances7,198.85 12,662.55 5,463.70

Total A 23,752.55 26,346.51

B)Current Liabilities

Current Liabilities15,211.04 19,443.77 4,232.73

Provisions

3,066.53 2,188.36 878.17Total of B

18,277.57 21,632.13 W.C (A-B)

5,474.98 4,714.38

Net increase in W.C

5,948.52 5,948.52

Total 11,216.37 11,216.37

72

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 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 computer net working capital turnover by dividing sales by working capital.

Working Capital Turnover Ratio= ____Sales___

Net Working Capital

Working Capital Turnover (Rs. In cr.)

Particular 2005-06 2006-07 2007-08 2008-09 2009-10Sales 14776.95 17645.29 24946.11 33856.54 36870.19

Net working capital

3378.6 3586.59 4419.13 8541.51 6902.74

W.C Turnover Ratio

4.3736902 4.9197956 5.6450274 3.9637651 5.3484725

73

Observations:- High working capital ratio indicates the capability of the organization to achieve

maximum sales with the minimum investment in working capital. Company working

capital ratio shows mostly more than 3, except for the year 2006-07 In the year 2009-

10 the ratio was around 5.34, it indicates that the capability of the company to achieve

maximum sales with the minimum investment in working capital.

CURRENT ASSETS TURNOVER RATIO

Current assets turnover ratio is calculate to know the firms efficiency of utilizing the

current assets .current assets includes the assets like inventories, sundry debtors, bills

receivable, cash in hand or bank, marketable securities, prepaid expenses and short

term loans and advances. This ratio includes the efficiency with which current assets

turn into sales. A higher ratio implies a more efficient use of funds thus high turnover

ratio indicate to reduced the lock up of funds in current assets. An analysis of this ratio

over a period of time reflects working capital management of a firm.

Current Assets Turnover Ratio= ____Sales_____

Current Assets

Calculation of Current Assets Turnover Ratio

(Rs. In Cr.)

Particular 2005-06 2006-07 2007-08 2008-09 2009-10

Sales 14776.95 17645.29 24946.11 33856.54 36870.19

Current Assets 9,484.64 11,948.60 16,311.88 23,752.55 26,346.51

Current Assets Turnover Ratio

1.557987441 1.476766316 1.529321574

1.425385485

1.399433549

74

Observations

It was observed that current assets turnover ratio does not indicate any trend over the

period of time. Turnover ratio was 1.55 in the year 2000-06 and decrease to 1.4767 in

the year 2006-07. Company increased its sales with increased investment in current

assets, thus current assets turnover ratio not increased.

75

Current Assets Turnover Ratio

CURRENT RATIO

The current is calculated by dividing current assets by current liabilities:

Current Ratio = ___Current assets__

Current liabilities

Current Ratio = Current Assets / Current Liabilities

Or

Current Assets : Current Liabilities

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

( Rs. In Cr.)

76

Particular 2005-06 2006-07 2007-08 2008-09 2009-10

Current Assets 9,484.64 11,948.60 16,311.88 23,752.55 26,346.51

Current Liabilities 6,106.04 8,362.01 11,892.75 15,211.04 19,443.77Current Ratio 1.5 1.42 1.37 1.56 1.355

Observations:

The current ratio indicates the availability of funds to payment of current liabilities in

the form of current assets. A higher ratio indicates that there were sufficient assets

available with the organization which can be converted in cash, without any reduction

in the value.

It is very high 1.56 in 2008-09, but regularly decreases. In 2009-10 it comes at 1.355.

77

QUICK RATIO

Quick ratio is also known as acid test ratio or liquid ratios it is more rigorous test

of liquidity than the current ratio. It establishes relationship between liquid assets

& current liabilities. An asset is said to be liquid if it can be converted into cash

within a shorter period without loss of value.

Quick ratio = Quick assets

current liabilities

( Rs. In Cr.)

Particular 2005-06 2006-07 2007-08 2008-09 2009-10

Quick Assets5,212.87 6,498.32 8,144.87 10,748.65 12,268.59

Current Liabilities 6,106.04 8,362.01 11,892.75 15,211.04 19,443.77

Quick Ratio 0.85 0.77 0.68 0.7 0.63

78

Observations:-

Quick ratio indicates that the company has sufficient liquid balance for the payment of

current liabilities. The liquid ratio of 1:1 is suppose to be standard or ideal but here

ratio is more than 1:1 over the period of time, it indicates that the firm maintains the

over liquid assets than actual requirement of such assets.

[

DEBT EQUITY RATIO

Definition: The Debt to Equity Ratio measures how much money a company should

safely be able to borrow over long periods of time. It does this by comparing the

company's total debt (including short term and long term obligations) and dividing it

by the amount of owner's equity .For now; you only need to know that the number can

be found at the bottom of the balance sheet. Actually calculate the debt to equity ratio

in segment two when we look at real balance sheets.)

Debt Equity Ratio = DEBT EQUITY

( Rs. In Cr.)

Particular 2005-06 2006-07 2007-08 2008-09 2009-10

Debt 1,453.57 2,077.75 3,583.99 6,556.03 6,800.83Equity 27.48 56.65 58.47 117.14 120.44

Debt Equity Ratio

52.89 36.67 61.29 55.96 56.46

79

Observations:-

The debt-equity ratio is normally defined as the long term debt divided by

shareholders' equity, which is the sum of the equity capital, any preference capital

issued, and free reserves and surplus with the company. A debt-equity ratio is also

important for bond investors, since a highly leveraged company could face problems

making interest payments.

80

CHAPTER – 6

CONCLUSION AND MAJOR FINDS

Conclusion

Working capital management is important aspect of financial management. The study

of working capital management of L&T has revealed that the Net Working Capital

was improving regularly from 3378.6 in 2005-06 and 6902.74 in 2009-10 which is as

per standard industrial practice. The current Assets of the company showed an

increasing Rs. 3524.14 Cr. in year 2005-06 from 2009-10, but in 2009-10 it stable at

Rs.6902.74 cr. The study has been conducted on working capital ratio analysis,

current ratio, and Change the working capital components which helped the company

to manage its working capital efficiency and affectively.

1. Working capital of the company was increasing from year 207.99 cr. From

2005-06 to 2006-07, Rs.4122.38 cr. increases form 2007-08 to 2008-09.

Rs. 6902.74 cr. in 2009-10 it comes down to Rs. 1638.77 cr. All

calculation is showing positive working capital per year. It shows good

liquidity position.

2. Positive working capital indicates that company has the ability of

payments of short terms liabilities.

3. Working capital increased because of increment in the current assets.

Company’s current assets were always more than requirement it affect on

profitability of the company.

81

4. In the year 2008-09 and 2009-10 working capital decreased because

increased of expenses as manufacturing expenses and increase the price of

raw material.

5. The size of the cash in the current assets of the company indicates the miss

cash management of the company. The cash balance in the year 2009-10

was extremely increased. Company failed to proper investment of available

cash.

Major Findings

Statement Showing Difference from Previous year:-

Particular 2006-07 2007-08 2008-09 2009-10

Investments 1,919.52 3,104.44 6,922.26 8,263.72

Inventories 2,210.27 3,001.14 4,305.91 5,805.05

Sundry Debtors 4,814.16 5,504.64 7,365.01 10,055.52

Cash & Bank Balance 398.71 993.68 779.86 693.13

Current Liabilities 6,106.04 8,362.01 11,892.75 15,211.04

Reserve 4,583.32 5,683.85 9,470.71 12,317.96

82

83

CHAPTER – 7

RECOMMENDATION AND LIMITATION

Limitations:-[

Even though every effort will be taken to minimize the variation and present a

factual picture with the help of statistical methods, but still there are some

limitations, which are as follows:

• The preparation and interpretation of data may not be 100% free from errors

and may be affected by the Respondents based mindset to some extent.

• Sampling size of the targeted employees of L&T is small, because non-

reachable due to their busy schedule.

• The study will be based on the balance sheet of the company and depends

directly on balance sheet and annual reports of the company.

Recommendation:-

Recommendation can be use by the firm for the betterment increased of the firm after

study and analysis of project report on study and analysis of working capital. I would

like to recommend.

1. Company should increase the inventory holding period. It is the major part

of working capital of company.

2. Company has to take control on cash balance because cash is non earning

assets and increase cost of funds.

3. Company should raise it fund through short term sources for short term

requirement of funds.

84

BIBLIOGRAPHY

[1] Afza, T. and M. S. Nazir, (2007). Working Capital Management Policies of Firms: Empirical Evidence from Pakistan. Conference Proceedings of 9th South Asian Management Forum (SAMF) on February 24-25, North South University, Dhaka, Bangladesh.

[2] Afza, T. and M. S. Nazir, (2008). Working Capital Approaches and Firm’s Returns. Pakistan Journal of Commerce and Social Sciences. 1(1), 25-36.

[3] Baltagi, B. H. (2001). Econometric Analysis of Panel Data. 2nd Edition, John Wiley & Sons. Chichester.

[4] Blinder, A. S. and L. Macinni, (1991). Taking Stock: A critical Assessment of Recent Research on Inventories. Journal of Economic Perspectives. 5(1), 73-96.

[5] Czyzewski, A.B., and D.W. Hicks, (1992). Hold Onto Your Cash. Management Accounting. 27-30.

[6] Deloof, M. (2003). Does Working Capital Management Affects profitability of Belgian Firms? Journal of Business Finance & Accounting. 30(3) & (4), 0306-686X.

[7] Economic Survey of Pakistan, (2006-07). Finance Division, Government of Pakistan.

[8] Eljelly, M.A. (2004). Liquidity – Profitability Tradeoff: An empirical investigation in an emerging market. International Journal of Commerce & Management. 14(2).

[9] Filbeck, G. and T. M. Krueger, (2005). An Analysis of Working Capital Management results across Industries. American Journal of Business. 20(2), 11-18.

[10] Garcia-Teruel, P.J. and Martinez-Solano, P. (2007). Effects of Working Capital Management on SME Profitability. International Journal of Managerial Finance. 3(2), 164-177. International Research Journal of Finance and Economics - Issue 47 (2010) 162[11] Gitman, L.J. (1991). Principles of Managerial Finance. Collins Publishers Inc. Harper. New York.

[12] Hausman, J.A. (1978), Specification Tests in Econometrics. Econometrica. 46, 1251-71.

85

[13] Jose, M. L., C. Lancaster, and J. L. Stevens, (1996). Corporate Returns and Cash Conversion Cycles. Journal of Economics and Finance. 20(1), 33-46.

[14] Kargar, J. and R. A. Blumenthal, (1994). Leverage Impact of Working Capital in Small Businesses. TMA Journal. 14(6), 46-53.

[15] Lazaridis, I. and D. Tryfonidis, (2006). Relationship between Working Capital Management and Profitability of Listed Companies in the Athens Stock Exchange. Journal of Financial Management and Analysis. 19 (1), 26 – 35.

[16] Mukhopadhyay, D. (2004). Working Capital Management in Heavy Engineering Firms—A Case Study. Accessed from myicwai.com/knowle dgebank /fm4 8.

[17] Padachi, K. (2006). Trends in Working Capital Management and its Impact on Firms’ Performance: An Analysis of Mauritian Small Manufacturing Firms. International Review of Business Research Papers. 2(2), 45 - 58.

Reference of Books

1. Management Accounting and Business Finance-By R.K. Sharma and Shashi K

Gupta-16th Edition 2008

2. Working Capital Management- By B. Murali Krishna 2010

3. Financial Management: Theory & Practice-By Prasanna Chandra 2004

Reference of Web Pages

1. http://www.answers.com/topic/cash-management

2. www.larsentoubro.com/

3. www.google.co.in

4. www.emarketer.com

5. www.marketreaserchworld.net

6. www.moneycontrol.com

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http://www.moneycontrol.com/

http://www.marketreaserchworld.net/

http://www.emarketer.com/

http://www.google.co.in/

http://www.larsentoubro.com/

http://www.answers.com/topic/cash-management

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