Project Report - Working Capital ManagementWORKING CAPITAL -
Meaning of Working CapitalCapital required for a business can be
classified under two main categories via,1) Fixed Capital2) Working
Capital Every business needs funds for two purposes for its
establishment and to carry out its day- to-day operations. Long
terms funds are required to create production facilities through
purchase of fixed assets such as p&m, land, building,
furniture, etc. Investments in these assets represent that part of
firms capital which is blocked on permanent or fixed basis and is
called fixed capital. Funds are also needed for short-term purposes
for the purchase of raw material, payment 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 firms
capital which is required for financing short- term or current
assets such as cash, marketable securities, debtors &
inventories. Funds, thus, invested in current assts keep revolving
fast and are being constantly converted in to cash and this cash
flows out again in exchange for other current assets. Hence, it is
also known as revolving or circulating capital or short term
capital.CONCEPT OF WORKING CAPITALThere are two concepts of working
capital:1. Gross working capital2. Net working capital The gross
working capital is the capital invested in the total current assets
of the enterprises current assets are thoseAssets which can convert
in to cash within a short period normally one accounting
year.CONSTITUENTS OF CURRENT ASSETS1) Cash in hand and cash at
bank2) Bills receivables3) Sundry debtors4) Short term loans and
advances.5) Inventories of stock as:a. Raw materialb. Work in
processc. Stores and spares d. Finished goods6. Temporary
investment of surplus funds.7. Prepaid expenses8. Accrued
incomes.9. Marketable securities.In a narrow sense, the term
working capital refers to the net working. Net working capital is
the excess of current assets over current liability, or, say:NET
WORKING CAPITAL = CURRENT ASSETS CURRENT LIABILITIES.Net working
capital can be positive or negative. When the current assets
exceeds 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 out of the current assts or the income
business.CONSTITUENTS OF CURRENT LIABILITIES1. Accrued or
outstanding expenses.2. Short term loans, advances and deposits.3.
Dividends payable.4. Bank overdraft.5. Provision for taxation , if
it does not amt. to app. Of profit.6. Bills payable.7. Sundry
creditors.The gross working capital concept is financial or going
concern concept whereas net working capital is an accounting
concept of working capital. Both the concepts have their own
merits.The gross concept is sometimes preferred to the concept of
working capital for the following reasons:1. It enables the
enterprise to provide correct amount of working capital at correct
time.2. Every management is more interested in total current assets
with which it has to operate then the source from where it is made
available.3. It take into consideration of the fact every increase
in the funds of the enterprise would increase its working
capital.4. This concept is also useful in determining the rate of
return on investments in working capital. The net working capital
concept, however, is also important for following reasons: It is
qualitative concept, which indicates the firms ability to meet to
its operating expenses and short-term liabilities. IT indicates the
margin of protection available to the short term creditors. It is
an indicator of the financial soundness of enterprises. It suggests
the need of financing a part of working capital requirement out of
the permanent sources of funds.CLASSIFICATION OF WORKING
CAPITALWorking capital may be classified in to ways:o On the basis
of concept.o On the basis of time.On the basis of concept working
capital can be classified as gross working capital and net working
capital. On the basis of time, working capital may be classified
as: Permanent or fixed working capital. Temporary or variable
working capitalPERMANENT OR FIXED WORKING CAPITALPermanent or fixed
working capital is minimum amount which is required to ensure
effective utilization of fixed facilities and for maintaining the
circulation of current assets. Every firm has to maintain a minimum
level of raw material, work- in-process, finished goods and cash
balance. This minimum level of current assts is called permanent or
fixed working capital as this part of working is permanently
blocked in current assets. As the business grow the requirements of
working capital also increases due to increase in current
assets.TEMPORARY OR VARIABLE WORKING CAPITALTemporary or variable
working capital is the amount of working capital which is required
to meet the seasonal demands and some special exigencies. Variable
working capital can further be classified as seasonal working
capital and special working capital. The capital required to meet
the seasonal need of the enterprise is called seasonal working
capital. Special working capital is that part of working capital
which is required to meet special exigencies such as launching of
extensive marketing for conducting research, etc.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. IMPORTANCE OR ADVANTAGE OF ADEQUATE
WORKING CAPITAL SOLVENCY OF THE BUSINESS: Adequate working capital
helps in maintaining the solvency of the business by providing
uninterrupted of production. Goodwill: Sufficient amount of working
capital enables a firm to make prompt payments and makes and
maintain the goodwill. Easy loans: Adequate working capital leads
to high solvency and credit standing can arrange loans from banks
and other on easy and favorable terms. Cash Discounts: Adequate
working capital also enables a concern to avail cash discounts on
the purchases and hence reduces cost. Regular Supply of Raw
Material: Sufficient working capital ensures regular supply of raw
material and continuous production. Regular Payment Of Salaries,
Wages And Other Day TO Day Commitments: It leads to the
satisfaction of the employees and raises the morale of its
employees, increases their efficiency, reduces wastage and costs
and enhances production and profits. Exploitation Of Favorable
MarketConditions: If a firm is having adequate working capital then
it can exploit the favorable market conditions such as purchasing
its requirements in bulk when the prices are lower and holdings its
inventories for higher prices. Ability To Face Crises: A concern
can face the situation during the depression. Quick And Regular
Return On Investments: Sufficient working capital enables a concern
to pay quick and regular of dividends to its investors and gains
confidence of the investors and can raise more funds in future.
High Morale: Adequate working capital brings an environment of
securities, confidence, high morale which results in overall
efficiency in a business.EXCESS OR INADEQUATE WORKING CAPITALEvery
business concern should have adequate amount of working capital to
run its business operations. It should have neither redundant or
excess working capital nor inadequate nor shortages of working
capital. Both excess as well as short working capital positions are
bad for any business. However, it is the inadequate working capital
which is more dangerous from the point of view of the
firm.DISADVANTAGES OF REDUNDANT OR EXCESSIVE WORKING CAPITAL1.
Excessive working capital means ideal funds which earn no profit
for the firm and business cannot earn the required rate of return
on its investments.2. Redundant working capital leads to
unnecessary purchasing and accumulation of inventories.3. Excessive
working capital implies excessive debtors and defective credit
policy which causes higher incidence of bad debts.4. It may reduce
the overall efficiency of the business.5. If a firm is having
excessive working capital then the relations with banks and other
financial institution may not be maintained.6. Due to lower rate of
return n investments, the values of shares may also fall.7. The
redundant working capital gives rise to speculative
transactionsDISADVANTAGES OF INADEQUATE WORKING CAPITALEvery
business needs some amounts of working capital. The need for
working capital arises due to the time gap between production and
realization of cash from sales. There is an operating cycle
involved in sales and realization of cash. There are time gaps in
purchase of raw material and production; production and sales; and
realization of cash.Thus working capital is needed for the
following purposes: For the purpose of raw material, components and
spares. To pay wages and salaries To incur day-to-day expenses and
overload costs such as office expenses. To meet the selling costs
as packing, advertising, etc. To provide credit facilities to the
customer. To maintain the inventories of the 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 requires
a lot of funds to meet its initial requirements such as promotion
and formation etc. These expenses are called preliminary expenses
and are capitalized. The amount needed for working capital depends
upon the size of the company and ambitions of its promoters.
Greater the size of the business unit, generally larger will be the
requirements of the working capital.The requirement of the working
capital goes on increasing with the growth and expensing of the
business till it gains maturity. At maturity the amount of working
capital required is called normal working capital.There are others
factors also influence the need of working capital in a
business.FACTORS DETERMINING THE WORKING CAPITAL REQUIREMENTS1.
NATURE OF BUSINESS: The requirements of working is very limited in
public utility undertakings such as electricity, water supply and
railways because they offer cash sale only and supply services not
products, and no funds are tied up in inventories and receivables.
On the other hand the trading and financial firms requires less
investment in fixed assets but have to invest large amt. of working
capital along with fixed investments.2. SIZE OF THE BUSINESS:
Greater the size of the business, greater is the requirement of
working capital.3. PRODUCTION POLICY: If the policy is to keep
production steady by accumulating inventories it will require
higher working capital.4. LENTH OF PRDUCTION CYCLE: The longer the
manufacturing time the raw material and other supplies have to be
carried for a longer in the process with progressive increment of
labor and service costs before the final product is obtained. So
working capital is directly proportional to the length of the
manufacturing process.5. SEASONALS VARIATIONS: Generally, during
the busy season, a firm requires larger working capital than in
slack season.6. WORKING CAPITAL CYCLE: The speed with which the
working cycle completes one cycle determines the requirements of
working capital. Longer the cycle larger is the requirement of
working capital. DEBTORSCASH FINISHED GOODSRAW MATERIAL WORK IN
PROGRESS7. RATE OF STOCK TURNOVER: There is an inverse
co-relationship between the question of working capital and the
velocity or speed with which the sales are affected. A firm having
a high rate of stock turnover wuill needs lower amt. of working
capital as compared to a firm having a low rate of turnover. 8.
CREDIT POLICY: A concern that purchases its requirements on credit
and sales its product / services on cash requires lesser amt. of
working capital and vice-versa.9. BUSINESS CYCLE: In period of
boom, when the business is prosperous, there is need for larger
amt. of working capital due to rise in sales, rise in prices,
optimistic expansion of business, etc. On the contrary in time of
depression, the business contracts, sales decline, difficulties are
faced in collection from debtor and the firm may have a large amt.
of working capital.10. RATE OF GROWTH OF BUSINESS: In faster
growing concern, we shall require large amt. of working capital.11.
EARNING CAPACITY AND DIVIDEND POLICY: Some firms have more earning
capacity than other due to quality of their products, monopoly
conditions, etc. Such firms may generate cash profits from
operations and contribute to their working capital. The dividend
policy also affects the requirement of working capital. A firm
maintaining a steady high rate of cash dividend irrespective of its
profits needs working capital than the firm that retains larger
part of its profits and does not pay so high rate of cash
dividend.12. PRICE LEVEL CHANGES: Changes in the price level also
affect the working capital requirements. Generally rise in prices
leads to increase in working capital.Others FACTORS: These are:
Operating efficiency. Management ability. Irregularities of supply.
Import policy. Asset structure. Importance of labor. Banking
facilities, etc.MANAGEMENT OF WORKING CAPITALManagement of working
capital is concerned with the problem that arises in attempting to
manage the current assets, current liabilities. The basic goal of
working capital management is to manage the current assets and
current liabilities of a firm in such a way that a satisfactory
level of working capital is maintained, i.e. it is neither adequate
nor excessive as both the situations are bad for any firm. There
should be no shortage of funds and also no working capital should
be ideal. WORKING CAPITAL MANAGEMENT POLICES of a firm has a great
on its probability, liquidity and structural health of the
organization. So working capital management is three dimensional in
nature as1. It concerned with the formulation of policies with
regard to profitability, liquidity and risk.2. It is concerned with
the decision about the composition and level of current assets.3.
It is concerned with the decision about the composition and level
of current liabilities. WORKING CAPITAL ANALYSISAs we know working
capital is the life blood and the centre of a business. Adequate
amount of working capital is very much essential for the smooth
running of the business. And the most important part is the
efficient management of working capital in right time. The
liquidity position of the firm is totally effected by the
management of working capital. So, a study of changes in the uses
and sources of working capital is necessary to evaluate the
efficiency with which the working capital is employed in a
business. This involves the need of working capital analysis.The
analysis of working capital can be conducted through a number of
devices, such as:1. Ratio analysis.2. Fund flow analysis.3.
Budgeting.1. RATIO ANALYSISA ratio is a simple arithmetical
expression one number to another. The technique of ratio analysis
can be employed for measuring short-term liquidity or working
capital position of a firm. The following ratios can be calculated
for these purposes:1. Current ratio.2. Quick ratio3. Absolute
liquid ratio4. Inventory turnover.5. Receivables turnover.6.
Payable turnover ratio.7. Working capital turnover ratio.8. Working
capital leverage9. Ratio of current liabilities to tangible net
worth.2. FUND FLOW ANALYSISFund flow analysis is a technical device
designated to the study the source from which additional funds were
derived and the use to which these sources were put. The fund flow
analysis consists of:a. Preparing schedule of changes of working
capitalb. Statement of sources and application of funds.It is an
effective management tool to study the changes in financial
position (working capital) business enterprise between beginning
and ending of the financial dates.3. WORKING CAPITAL BUDGETA budget
is a financial and / or quantitative expression of business plans
and polices to be pursued in the future period time. Working
capital budget as a part of the total budge ting process of a
business is prepared estimating future long term and short term
working capital needs and sources to finance them, and then
comparing the budgeted figures with actual performance for
calculating the variances, if any, so that corrective actions may
be taken in future. He objective working capital budget is to
ensure availability of funds as and needed, and to ensure effective
utilization of these resources. The successful implementation of
working capital budget involves the preparing of separate budget
for each element of working capital, such as, cash, inventories and
receivables etc. ANALYSIS OF SHORT TERM FINANCIAL POSITION OR TEST
OF LIQUIDITYThe short term creditors of a company such as suppliers
of goods of credit and commercial banks short-term loans are
primarily interested to know the ability of a firm to meet its
obligations in time. The short term obligations of a firm can be
met in time only when it is having sufficient liquid assets. So to
with the confidence of investors, creditors, the smooth functioning
of the firm and the efficient use of fixed assets the liquid
position of the firm must be strong. But a very high degree of
liquidity of the firm being tied up in current assets. Therefore,
it is important proper balance in regard to the liquidity of the
firm. Two types of ratios can be calculated for measuring
short-term financial position or short-term solvency position of
the firm.1. Liquidity ratios.2. Current assets movements ratios.A)
LIQUIDITY RATIOSLiquidity refers to the ability of a firm to meet
its current obligations as and when these become due. The
short-term obligations are met by realizing amounts from current,
floating or circulating assts. The current assets should either be
liquid or near about liquidity. These should be convertible in cash
for paying obligations of short-term nature. The sufficiency or
insufficiency of current assets should be assessed by comparing
them with short-term liabilities. If current assets can pay off the
current liabilities then the liquidity position is satisfactory. On
the other hand, if the current liabilities cannot be met out of the
current assets then the liquidity position is bad. To measure the
liquidity of a firm, the following ratios can be calculated:1.
CURRENT RATIO2. QUICK RATIO3. ABSOLUTE LIQUID RATIO1. CURRENT
RATIOCurrent Ratio, also known as working capital ratio is a
measure of general liquidity and its most widely used to make the
analysis of short-term financial position or liquidity of a firm.
It is defined as the relation between current assets and current
liabilities. Thus,CURRENT RATIO = CURRENT ASSETS CURRENT
LIABILITESThe two components of this ratio are:1) CURRENT ASSETS2)
CURRENT LIABILITESCurrent assets include cash, marketable
securities, bill receivables, sundry debtors, inventories and
work-in-progresses. Current liabilities include outstanding
expenses, bill payable, dividend payable etc.A relatively high
current ratio is an indication that the firm is liquid and has the
ability to pay its current obligations in time. On the hand a low
current ratio represents that the liquidity position of the firm is
not good and the firm shall not be able to pay its current
liabilities in time. A ratio equal or near to the rule of thumb of
2:1 i.e. current assets double the current liabilities is
considered to be satisfactory.CALCULATION OF CURRENT RATIO (Rupees
in crore)e.g.Year200620072008
Current Assets81.2983.1213,6.57
Current Liabilities27.4220.5833.48
Current Ratio2.96:14.03:14.08:1
Interpretation:-As we know that ideal current ratio for any firm
is 2:1. If we see the current ratio of the company for last three
years it has increased from 2006 to 2008. The current ratio of
company is more than the ideal ratio. This depicts that companys
liquidity position is sound. Its current assets are more than its
current liabilities.2. QUICK RATIOQuick ratio is a more rigorous
test of liquidity than current ratio. Quick ratio may be defined as
the relationship between quick/liquid assets and current or liquid
liabilities. An asset is said to be liquid if it can be converted
into cash with a short period without loss of value. It measures
the firms capacity to pay off current obligations immediately.QUICK
RATIO = QUICK ASSETS CURRENT LIABILITESWhere Quick Assets are:1)
Marketable Securities2) Cash in hand and Cash at bank.3) Debtors.A
high ratio is an indication that the firm is liquid and has the
ability to meet its current liabilities in time and on the other
hand a low quick ratio represents that the firms liquidity position
is not good.As a rule of thumb ratio of 1:1 is considered
satisfactory. It is generally thought that if quick assets are
equal to the current liabilities then the concern may be able to
meet its short-term obligations. However, a firm having high quick
ratio may not have a satisfactory liquidity position if it has slow
paying debtors. On the other hand, a firm having a low liquidity
position if it has fast moving inventories.CALCULATION OF QUICK
RATIOe.g. (Rupees in Crore)Year200620072008
Quick Assets44.1447.4361.55
Current Liabilities27.4220.5833.48
Quick Ratio1.6 : 12.3 : 11.8 : 1
Interpretation : A quick ratio is an indication that the firm is
liquid and has the ability to meet its current liabilities in time.
The ideal quick ratio is 1:1. Companys quick ratio is more than
ideal ratio. This shows company has no liquidity problem.3.
absolute liquid ratio Although receivables, debtors and bills
receivable are generally more liquid than inventories, yet there
may be doubts regarding their realization into cash immediately or
in time. So absolute liquid ratio should be calculated together
with current ratio and acid test ratio so as to exclude even
receivables from the current assets and find out the absolute
liquid assets. Absolute Liquid Assets includes :Absolute liquid
ratio = absolute liquid assets CURRENT LIABILITESAbsolute liquid
assets = cash & bank balances. e.g. (Rupees in
Crore)Year200620072008
Absolute Liquid Assets4.691.795.06
Current Liabilities27.4220.5833.48
Absolute Liquid Ratio.17 : 1.09 : 1.15 : 1
Interpretation : These ratio shows that company carries a small
amount of cash. But there is nothing to be worried about the lack
of cash because company has reserve, borrowing power & long
term investment. In India, firms have credit limits sanctioned from
banks and can easily draw cash.B) current assets movement
ratiosFunds are invested in various assets in business to make
sales and earn profits. The efficiency with which assets are
managed directly affects the volume of sales. The better the
management of assets, large is the amount of sales and profits.
Current assets movement ratios measure the efficiency with which a
firm manages its resources. These ratios are called turnover ratios
because they indicate the speed with which assets are converted or
turned over into sales. Depending upon the purpose, a number of
turnover ratios can be calculated. These are :1. Inventory Turnover
Ratio2. Debtors Turnover Ratio3. Creditors Turnover Ratio4. Working
Capital Turnover RatioThe current ratio and quick ratio give
misleading results if current assets include high amount of debtors
due to slow credit collections and moreover if the assets include
high amount of slow moving inventories. As both the ratios ignore
the movement of current assets, it is important to calculate the
turnover ratio.1. Inventory Turnover or Stock Turnover Ratio :Every
firm has to maintain a certain amount of inventory of finished
goods so as to meet the requirements of the business. But the level
of inventory should neither be too high nor too low. Because it is
harmful to hold more inventory as some amount of capital is blocked
in it and some cost is involved in it. It will therefore be
advisable to dispose the inventory as soon as possible.inventory
turnover ratio = cost of good sold Average inventoryInventory
turnover ratio measures the speed with which the stock is converted
into sales. Usually a high inventory ratio indicates an efficient
management of inventory because more frequently the stocks are sold
; the lesser amount of money is required to finance the inventory.
Where as low inventory turnover ratio indicates the inefficient
management of inventory. A low inventory turnover implies over
investment in inventories, dull business, poor quality of goods,
stock accumulations and slow moving goods and low profits as
compared to total investment.average stock = opening stock +
closing stock 2(Rupees in Crore)Year200620072008
Cost of Goods sold110.6103.296.8
Average Stock73.5936.4255.35
Inventory Turnover Ratio1.5 times2.8 times1.75 times
Interpretation : These ratio shows how rapidly the inventory is
turning into receivable through sales. In 2007 the company has high
inventory turnover ratio but in 2008 it has reduced to 1.75 times.
This shows that the companys inventory management technique is less
efficient as compare to last year.2. Inventory conversion
period:Inventory conversion period = 365 (net working days)
inventory turnover ratioe.g.Year200620072008
Days365365365
Inventory Turnover Ratio1.52.81.8
Inventory Conversion Period243 days130 days202 days
Interpretation : Inventory conversion period shows that how many
days inventories takes to convert from raw material to finished
goods. In the company inventory conversion period is decreasing.
This shows the efficiency of management to convert the inventory
into cash.3. debtors turnover ratio :A concern may sell its goods
on cash as well as on credit to increase its sales and a liberal
credit policy may result in tying up substantial funds of a firm in
the form of trade debtors. Trade debtors are expected to be
converted into cash within a short period and are included in
current assets. So liquidity position of a concern also depends
upon the quality of trade debtors. Two types of ratio can be
calculated to evaluate the quality of debtors.a) Debtors Turnover
Ratiob) Average Collection PeriodDebtors Turnover Ratio = Total
Sales (Credit) Average DebtorsDebtors velocity indicates the number
of times the debtors are turned over during a year. Generally
higher the value of debtors turnover ratio the more efficient is
the management of debtors/sales or more liquid are the debtors.
Whereas a low debtors turnover ratio indicates poor management of
debtors/sales and less liquid debtors. This ratio should be
compared with ratios of other firms doing the same business and a
trend may be found to make a better interpretation of the
ratio.average debtors= opening debtor+closing debtor
2e.g.Year200620072008
Sales166.0151.5169.5
Average Debtors17.3318.1922.50
Debtor Turnover Ratio9.6 times8.3 times7.5 times
Interpretation : This ratio indicates the speed with which
debtors are being converted or turnover into sales. The higher the
values or turnover into sales. The higher the values of debtors
turnover, the more efficient is the management of credit. But in
the company the debtor turnover ratio is decreasing year to year.
This shows that company is not utilizing its debtors efficiency.
Now their credit policy become liberal as compare to previous
year.4. average collection period :Average Collection Period = No.
of Working Days Debtors Turnover RatioThe average collection period
ratio represents the average number of days for which a firm has to
wait before its receivables are converted into cash. It measures
the quality of debtors. Generally, shorter the average collection
period the better is the quality of debtors as a short collection
period implies quick payment by debtors and vice-versa.Average
Collection Period = 365 (Net Working Days) Debtors Turnover
RatioYear200620072008
Days365365365
Debtor Turnover Ratio9.68.37.5
Average Collection Period38 days44 days49 days
Interpretation : The average collection period measures the
quality of debtors and it helps in analyzing the efficiency of
collection efforts. It also helps to analysis the credit policy
adopted by company. In the firm average collection period
increasing year to year. It shows that the firm has Liberal Credit
policy. These changes in policy are due to competitors credit
policy.5. Working capital turnover ratio :Working capital turnover
ratio indicates the velocity of utilization of net working capital.
This ratio indicates the number of times the working capital is
turned over in the course of the year. This ratio measures the
efficiency with which the working capital is used by the firm. A
higher ratio indicates efficient utilization of working capital and
a low ratio indicates otherwise. But a very high working capital
turnover is not a good situation for any firm.Working Capital
Turnover Ratio = Cost of Sales Net Working CapitalWorking Capital
Turnover = Sales Networking Capitale.g.Year200620072008
Sales166.0151.5169.5
Networking Capital53.8762.52103.09
Working Capital Turnover3.08 2.41.64
Interpretation : This ratio indicates low much net working
capital requires for sales. In 2008, the reciprocal of this ratio
(1/1.64 = .609) shows that for sales of Rs. 1 the company requires
60 paisa as working capital. Thus this ratio is helpful to forecast
the working capital requirement on the basis of
sale.Inventories(Rs. in Crores)Year2005-20062006-20072007-2008
Inventories37.1535.6975.01
Interpretation : Inventories is a major part of current assets.
If any company wants to manage its working capital efficiency, it
has to manage its inventories efficiently. The graph shows that
inventory in 2005-2006 is 45%, in 2006-2007 is 43% and in 2007-2008
is 54% of their current assets. The company should try to reduce
the inventory upto 10% or 20% of current assets.Cash bnak balance
:(Rs. in Crores)Year2005-20062006-20072007-2008
Cash Bank Balance4.691.795.05
Interpretation : Cash is basic input or component of working
capital. Cash is needed to keep the business running on a
continuous basis. So the organization should have sufficient cash
to meet various requirements. The above graph is indicate that in
2006 the cash is 4.69 crores but in 2007 it has decrease to 1.79.
The result of that it disturb the firms manufacturing operations.
In 2008, it is increased upto approx. 5.1% cash balance. So in
2008, the company has no problem for meeting its requirement as
compare to 2007. debtors :(Rs. in
Crores)Year2005-20062006-20072007-2008
Debtors17.3319.0525.94
Interpretation : Debtors constitute a substantial portion of
total current assets. In India it constitute one third of current
assets. The above graph is depict that there is increase in
debtors. It represents an extension of credit to customers. The
reason for increasing credit is competition and company liberal
credit policy. current assets :(Rs. in
Crores)Year2005-20062006-20072007-2008
Current Assets81.2983.15136.57
Interpretation : This graph shows that there is 64% increase in
current assets in 2008. This increase is arise because there is
approx. 50% increase in inventories. Increase in current assets
shows the liquidity soundness of company.current liability :(Rs. in
Crores)Year2005-20062006-20072007-2008
Current Liability27.4220.5833.48
Interpretation : Current liabilities shows company short term
debts pay to outsiders. In 2008 the current liabilities of the
company increased. But still increase in current assets are more
than its current liabilities.net wokring capital :(Rs. in
Crores)Year2005-20062006-20072007-2008
Net Working Capital53.8762.53103.09
Interpretation : Working capital is required to finance day to
day operations of a firm. There should be an optimum level of
working capital. It should not be too less or not too excess. In
the company there is increase in working capital. The increase in
working capital arises because the company has expanded its
business.RESEARCH METHODOLOGYThe methodology, I have adopted for my
study is the various tools, which basically analyze critically
financial position of to the organization: I. COMMON-SIZE P/L A/C
II. COMMON-SIZE BALANCE SHEET III. COMPARTIVE P/L A/C IV.
COMPARTIVE BALANCE SHEET V. TREND ANALYSIS VI. RATIO ANALYSISThe
above parameters are used for critical analysis of financial
position. With the evaluation of each component, the financial
position from different angles is tried to be presented in well and
systematic manner. By critical analysis with the help of different
tools, it becomes clear how the financial manager handles the
finance matters in profitable manner in the critical challenging
atmosphere, the recommendation are made which would suggest the
organization in formulation of a healthy and strong position
financially with proper management system.I sincerely hope, through
the evaluation of various percentage, ratios and comparative
analysis, the organization would be able to conquer its in
efficiencies and makes the desired changes.ANALYSIS OF FINANCIAL
STATEMENTS FINANCIAL STATEMENTS: Financial statement is a
collection of data organized according to logical and consistent
accounting procedure to convey an under-standing of some financial
aspects of a business firm. It may show position at a moment in
time, as in the case of balance sheet or may reveal a series of
activities over a given period of time, as in the case of an income
statement. Thus, the term financial statements generally refers to
the two statements (1) The position statement or Balance sheet. (2)
The income statement or the profit and loss Account. OBJECTIVES OF
FINANCIAL STATEMENTS: According to accounting Principal Board of
America (APB) states The following objectives of financial
statements: - 1. To provide reliable financial information about
economic resources and obligation of a business firm. 2. To provide
other needed information about charges in such economic resources
and obligation. 3. To provide reliable information about change in
net resources (recourses less obligations) missing out of business
activities. 4. To provide financial information that assets in
estimating the learning potential of the business. LIMITATIONS OF
FINANCIAL STATEMENTS: Though financial statements are relevant and
useful for a concern, still they do not present a final picture a
final picture of a concern. The utility of these statements is
dependent upon a number of factors. The analysis and interpretation
of these statements must be done carefully otherwise misleading
conclusion may be drawn. Financial statements suffer from the
following limitations: - 1. Financial statements do not given a
final picture of the concern. The data given in these statements is
only approximate. The actual value can only be determined when the
business is sold or liquidated. 2. Financial statements have been
prepared for different accounting periods, generally one year,
during the life of a concern. The costs and incomes are apportioned
to different periods with a view to determine profits etc. The
allocation of expenses and income depends upon the personal
judgment of the accountant. The existence of contingent assets and
liabilities also make the statements imprecise. So financial
statement are at the most interim reports rather than the final
picture of the firm. 3. The financial statements are expressed in
monetary value, so they appear to give final and accurate position.
The value of fixed assets in the balance sheet neither represent
the value for which fixed assets can be sold nor the amount which
will be required to replace these assets. The balance sheet is
prepared on the presumption of a going concern. The concern is
expected to continue in future. So fixed assets are shown at cost
less accumulated deprecation. Moreover, there are certain assets in
the balance sheet which will realize nothing at the time of
liquidation but they are shown in the balance sheets. 4. The
financial statements are prepared on the basis of historical costs
Or original costs. The value of assets decreases with the passage
of time current price changes are not taken into account. The
statement are not prepared with the keeping in view the economic
conditions. the balance sheet loses the significance of being an
index of current economics realities. Similarly, the profitability
shown by the income statements may be represent the earning
capacity of the concern. 5. There are certain factors which have a
bearing on the financial position and operating result of the
business but they do not become a part of these statements because
they cannot be measured in monetary terms. The basic limitation of
the traditional financial statements comprising the balance sheet,
profit & loss A/c is that they do not give all the information
regarding the financial operation of the firm. Nevertheless, they
provide some extremely useful information to the extent the balance
sheet mirrors the financial position on a particular data in lines
of the structure of assets, liabilities etc. and the profit &
loss A/c shows the result of operation during a certain period in
terms revenue obtained and cost incurred during the year. Thus, the
financial position and operation of the firm. FINANCIAL STATEMENT
ANALYSISIt is the process of identifying the financial strength and
weakness of a firm from the available accounting data and financial
statements. The analysis is done CALCULATIONS OF RATIOSRatios are
relationship expressed in mathematical terms between figures, which
are connected with each other in some manner.CLASSIFICATION OF
RATIOSRatios can be classified in to different categories depending
upon the basis of classificationThe traditional classification has
been on the basis of the financial statement to which the
determination of ratios belongs.These are:- Profit & Loss
account ratios Balance Sheet ratios Composite ratios Project
Description :Title : Project Report on Working Capital Management
Pages : 73Description : Project Report on Working Capital
Management, Working capital analysis, Working Capital Management -
Meaning & Concept, working capital Classification, Importance,
Advantages and Disadvantages of Working Capital, Factors
determining the working capital requirements & Ratio
AnalysisCategory : Project Report for MBA We made this project of
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