Sri Working Capital FINAL

Effectiveness of Working Capital Management at Mecolam Eng Pvt Ltd

Introduction of Finance:

Finance is one of the major elements. Which activities the overall growth of the

economy, Finance is regard as the lifeblood of a business enterprise This is because in the

modem money-oriented economy finance is one the basic foundations of all kinds of

economic activities. It is the master key which provides the access to all the sources for

being employed in manufacturing and merchandising activities. It has rightly been said that

business needs money to take more money. How ever it is also prove that so money will get

more money. Only when it is properly managed.

Hence efficient management of every business enterprises is closely linked with

efficient management of finance.

Meaning of Finance:

Finance is the main business activity, which are concerned with the acquisition and

conservation of capital funds in meeting financial needs and overall objectives of a business

enterprise.

Financial system calls for the effective performance of financial institution,

financial Instruments and financial market.

Financial Management:

The Management makes use of various financial techniques device etc. for

administrating the financial assets of the firm the most effective way. Financial

management therefore means the entire games of management efforts divided to the

management of finance, with its sources and services of the enterprise.

EAST POINT COLLEGE OF HIGHER EDUCATION

-1-


WORKING CAPITAL

Capital required for a business can be classified under two main categories via,

1) Fixed Capital

2) 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 firm’s 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 firm’s 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.

Working capital is commonly defined in accounting and financial analysis as net

current assets consisting of inventories, including goods, net receivables, marketable

securities, Bank balances and cash in hand.

DEFINITION OF WORKING CAPTIAL:

According to MY Khan and P.K Jain “Working capital refers to manage the firm

current assets and current liabilities in such a way that a satisfactory level of working

capital is maintained.

According to the Shubin “working capital is an amount of fun is necessary to cover

the cost of operating the enterprise”.


-2-


Working capital management is concerned with the problems is that arise in

attempting to manage the current assets and the current liabilities and their inter relationship

they arise between them.

Current assets refer to those assets which to ordinary course of business can be or

will be turned into cash within one year without undergoing a diminution in value and

without disrupting the operations of the firm.

The major current assets are cash marketable securities accounts receivable and

their inception to be paid in the ordinary course of business within a year out of Current

Assets or earnings of the concern. The basic Current Liabilities are Bill payables, Bank

Overdrafts and Outstanding expenses.

The goal of working capital managements is to manage the firms Current Assets.

And Current Liabilities in such a way that a satisfactory level of working capital is

maintained.

Thus the current assets should be large enough to cover its current Liabilities in

order to ensure a reasonable margin of safety. Each of the current assts must be efficiently

in order to maintain the liquidity of the short term be managed efficiently in order to

maintain the liquidity of the short term sources of financing must be continuously managed

to ensure that they are obtained and used in a best possible way.

Therefore interaction between current assets and current liabilities in the main

theme of working capital Management.

The current assets should be large enough to cover is current liabilities in order to

ensure a reasonable margin of safety. The interaction between current assets and current

liabilities in therefore the main theme of the threat of working capital management.


-3-


CONCEPTS OF WORKING CAPITAL

There are two concepts of working capital:-

Balance sheet concept

Operating cycle or Circular flow Concept.

On the basis of balance sheet Working capital may be classified in two ways:ON THE BASIS OF CONCEPT.ON THE BASIS OF TIME.

WORKING CAPITAL

ON THE BASIS OF CONCEPT ON THE BASIS OF TIME

& &

Gross working capital also referred to as working capital means the firm’s investment in current assets.i.e

Net working capital refers to the difference between current assets and current liabilities. i.e.


-4-

GROSS WORKING CAPITALGROSS WORKING CAPITAL

NET WORKING CAPITALNET WORKING CAPITAL

PERMANENT WORKING CAPITALPERMANENT WORKING CAPITAL

TEMPRORY WORKING CAPITAL

TEMPRORY WORKING CAPITAL

CURRENT ASSETS CURRENT LIABILITIES

TOTAL OF CURRENT ASSETS


CURRENT ASSETS:

Current assets are those assets which in the ordinary course of business can be converted into cash or held in the business for the short time only.

Constituents of Current Assets:-

STOCK OF RAW MATERIAL

WORK IN PROGRESS

FINISHED GOODS

TRADE DEBOTRS

PREPAYMENTS

CASH BALANCES

CURRENT LIABILITIES:

Current Liabilities refers to short term debts of the business. It is money owned by a business which will need to be repaid within the next 12 months.

Constituents of Current Liabilities:-

TRADE CREDITORS

SHORT TERM LOANS

BANK OVERDRAFTS

DIVIDEND DUE FOR PAYMENT TAX DUE TO PAY WITHIN THE NEXT 12 MONTHS.

On the basis of time 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:

a. Permanent or fixed working capital.

b. Temporary or variable working capital


-5-


Permanent or Fixed Working Capital

Permanent 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 Capital

Temporary 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.

In Fig. 1, permanent working capital is stable of fixed over time while the temporary or

variable working capital fluctuates. In fig.2, permanent working capital is also increasing


-6-


with the passage of time due to expansion of business but even then it does not fluctuate as

variable working capital which sometimes increases and sometimes decreases.

Operating cycle or Circular Flow Concept

The circular flow concept of working capital is based upon this operating or working

capital cycle or a firm. The cycle starts with the purchase of raw materials and other

resources and ends with the realization of cash from the sale of finished goods. It involves

purchase of raw material and stores its conversion into stock of finished goods through

work-in-progress with progressive increasment of labor and service costs, conversion of

finished stock into sales debtors and receivables and ultimately realization of cash and this

cycle continues again form cash to purchase of raw material and so on. The time duration

required to complete one cycle determines the requirements of working capital longer the

period of cycle, larger is the requirements of working capital.

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)

Chart Showing Operating Cycle


-7-


The Need of Working Capital:

Working capital is needed for the following purposes:

1. For the purpose of raw material, components and spares.

2. To pay wages and salaries

3. To incur day-to-day expenses and overload costs such as office expenses.

4. To meet the selling costs as packing, advertising, etc.

5. To provide credit facilities to the customer.

6. To maintain the inventories of the raw material, work-in-progress, stores and spares

and finished stock.

FACTORS DETERMINING THE WORKING CAPITAL REQUIREMENTS

1. 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:


-8-


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.

7. 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.


-9-


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:

ü Operating efficiency.

ü Management ability.

ü Irregularities of supply.

ü Import policy.

ü Asset structure.

ü Importance of labor.

ü Banking facilities, etc.

SOURCE OF WORKING CAPITAL

The company can choose to finance its current assets by Long term sources Short term sources A combination of them.

Long term sources of permanent working capital include equity and preference

shares, retained earning, debentures and other long term debts from public deposits and

financial institution. The long term working capital needs should meet through long term

means of financing. Financing through long term means provides stability, reduces risk or

payment. And increases liquidity of the business concern. Various types of long term

sources of working capital are summarized as follow

1. Issue of shares


-10-


It is the primary and most important sources of regular or permanent working capital .

issuing equity shares as it does not create and burden on the income of the concern. Nor the

concern is obliged to refund capital should preferably raise permanent working capital.

2. Retained earnings

Retain earning accumulated profits are a permanent sources of regular working capital. It is

regular and cheapest. It creates not charge on future profits of the enterprises.

3. Issue of debentures

It crates a fixed charge on future earnings of the company. company is obliged to pay

interest . management should make wise choice in procuring funds by issue of debentures.

4. Long term debt

Company can raise fund from accepting public deposits, debts from financial institutution

like banks, corporations etc. the cost is higher than the other financial tools.

Other sources sale of idle fixed assets , securities received from employees and customers

are examples of other sources of finance.

5. Short term sources of temporary working capital

Temporary working capital is required to meet the day to day business expenditures. The

variable working capital would finance from short term sources of funds. And only the

period needed . it has the benefits of ,low cost and establishes closer relationships with

banker.

Some sources of temporary working capital are given below;

1. Commercial bank

A commercial bank constitutes a significant sources for short term or temporary working

capital . this will be in the form of short term loans, cash credit, and overdraft and though

discounting the bills of exchanges.

2. Public deposits


-11-


most of the companies in recent years depends on this sources to meet their short term

working capital requirements ranging fro six month to three years.

3.Various credits

trade credit, business credit papers and customer credit are other sources of short term

working capital. Credit from suppliers, advances from customers, bills of exchanges,

promissnotes, etc helps to raise temporary working capital

4. Reserves and other funds

various funds of the company like depreciation fund. Provision for tax and other provisions

kept with the company can be used as temporary working capital.

The company should meet its working capital needs through both long term and short term

funds. It will be appropriate to meet at least 2/3 of the permanent working capital

equipments form long term sources, whereas the variables working capital should be

financed from short term sources. The working capital financing mix should be designed in

such a way that the overall cost of working capital is the lowest, and the funds are available

on time and for the period they are really required.

SOURCES OF ADDITIONAL WORKING CAPITAL

Sources of additional working capital include the following

Existing cash reserves

Profits(when you secure it as cash)

payables(credit from suppliers)

new equity or loans from shareholder

bank overdrafts line of credit

long term loans

ADEQUATE WORKING CAPITAL


-12-


As I stated about keeping adequate working capital is the mantas towards the success of

financial management. The term adequate working capital refuters to the amount of

working capital to be kept with the organization to met its daily operations. Large

investment in fixed assets not sufficient to run a business successfully. Adequate

working capital is equally important. Without working capita fixed assets are like a gun,

which cannot shoot, as there are no cartridges.

It is said that “inadequate working capital is a disastrous: where as redundant working

capital is a criminal waste.” It is clear that the company can’t invest all its funds in

current assets to increase working capital. At the same time it requires to keep sufficient

funds with it. So a proper leverage between both ends is needed to assure proper

running of the business. It needs to keep adequate working capital with it. Neither less

nor more than needed.

ADAVANTAGES OF ADEQUATE WORKING CAPITAL

Adequate working capital provides certain benefits to the company they are:

1. Increase in debt capacity and goodwill;

Adequate working capital represents the financial soundness of the company. If one

company is financially sound it would be able to pay its creditors timely and properly. It

will increase companies goodwill. It crests confidence among investors and creditors.

Thus a firm with adequate working capital can raise requisite funds from market ,

borrow short term credit form banks, and purchases inventories of raw material etc., for

the smooth operations of its business.

2. Increase in production inefficiency

With adequate working capital the firm can smoothly carryout research and

development actives and thus adds to it production efficiency.

3. Exploitation of favorable opportunities:


-13-


In the presence of adequate working capital , a company can avail the benefits of

favorable opportunities. Adequate working capital will help the company to have bulk

purchases, seasonal storage of raw material etc., which would reduce the cost of

production, thus adds to its profit.

4. Meeting contingencies adverse changes:

A company can easily face certain business and economic crises a company having

adequate working capital can successfully meet contingencies such as business

oscillations, financial crisis arising from heavy losses etc.,

5. Available cash discount:

Maintenance of adequate working capital enables a company to avail the advantage of

cash discount by making cash payment for to the suppliers of raw materials and

merchandise. Obviously it will reduce the cost of production and increase the profit of

the company.

7. Solvency and efficiency fixed assets:

It helps to maintain the solvency of the company. So that payments could be made in

time as and when they fall due. Like wise, adequate working capital also increases the

efficiency for fixed assets insofar as their proper maintenance depends upon the

availability of funds.

8. Attractive dividend to shareholders:

It enables the company to offer attractive dividend to the shareholders so that sense of

security and confidence will increase among them . it also increases the market values

of its shares.

DANGERS OF INADEQUATE WORKING CAPITAL


-14-


Having inadequate working capital les to so many of dangers as it doesn’t fulfill its

purpose. Some are given below:

1. Loss of goodwill and creditworthiness:

As the firm fails to on or its current liabilities it loses it goodwill and creditworthiness

among its creditors. Consequently, the firm finds it difficult to procure the requisite

funds for its business operations on easy terms, which ultimately results in reduced

profitability as well as production interruption.

2. Firm can’t make use of favorable opportunities:

The firm fails to undertake the profitable projects, which not only prevent the fir from

availing the benefits of favorable opportunities but also stagnate its growth.

3. Adverse effects of credit opportunities:

The firm also fails to avail the attractive credit opportunities but also stagnate its growth

4. Operational inefficiencies:

In leads the company to operating inefficiencies, as day to day commitments cannot be

met.

5. Effects on financial capacity:

Inadequacy of working capital also weakness the shock absorbing capacity of the firm

because it cannot meet the contingencies arising form business oscillations, financial

losses, due to shortage of working capital.

6. Non achievement of profit target:

The firm cannot implement operational plans due to unavailability of fund. Which will

lead to non achievement of profit margin.

7. Low rate of return on capital:


-15-


Excessive or redundant working capital implies the presence of idle funds that earn no

profit to the firm. So it cannot earn a proper rate of return on its total investments,

whereas profits are distributed on its total investment, whereas profits are distributed on

the whole of its capital.

8. Decline in capital and efficiency:

Since the rate of return on capital is low the company tempts to make some adjustment

to inflate profit to increase the dividend. Some times these unearned dividend paid out

of the company’s capital to keep up the show of prosperity by window dressing of

accounts. Certain provision, such as provision for deprecation , repairs and renewals are

into made. This leads to decline in operating efficiency of the firm.

9. Loss of goodwill and confidence:

Lower rate of return leads to lower dividend available to share holder. This leads to

down fall in market value of the company’s share and markets the shareholder lose their

confident in company.

It is evident form the foregoing discussion that a company must have adequate working

capital pursuant to its requirements. It should neither be excessive not inadequate. Both

situation are dangerous. While inadequate working capital adversely affects the

business operations and profitability . excessive working capital remains idle and earns

no profits for the company. So company must assure its working capital is adequate for

its operations.

Management of Working Capital


-16-


Management 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 as

1. 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.

Sources of Working Capital

Among the various available for financing working capital needs, a finance manager has to

select the best suitable source depending on the working capital needs of the company.

Permanent of fixed sources:

1. Issue of shares

2. Issue of debenture

3. Public deposits

4. Ploughing back of profits

5. Loans from financial institutions

Financing of temporary, variable, or short term working capital

The main source of short term working capital is as follows:

1. Indigenous bankers

2. Trade credit

3. Installment credit

4. Advances

5. Accounts receivables credit or factoring

6. Accrued expenses

7. Deferred incomes


-17-


8. Commercial paper

9. Commercial banks

Working capital Management can be classified into:

1. Cash Management

2. Receivables Management

3. Inventory Management

Chart showing Classification of Working Capital Management

Management of cash:

Introduction:

Cash is one of the current assets of a business; it is needed at all times to keep the business

going. A business concern should always keep sufficient cash for meeting its obligations.

Any shortage of cash will hamper the operations of a concern and any excess of it will be

unproductive. Cash is the most unproductive of all the assets. While fixed assets like

machinery, plant, etc and current assets such as inventory will help the business in

increasing its earning capacity, cash in hand will not ad anything to the concern. It is in this

context that cash management has assumed much importance.

Motives for holding cash:


-18-

Working Capital Management

Cash ManagementReceivables Management

Inventory Management


1. Transaction motive: the transaction needs of cash can be anticipated because the

expected payments in near future can be estimated. The receipts in future may also be

anticipated but the things do not happen as desired. If more cash is needed for payments

than receipts, it may be raised through bank overdraft. On the other hand if there are more

cash receipts than payments, it may be spent on marketable securities. The maturity of

securities may be adjusted to the payments in future such as interest payment, dividend

payment, etc

2. Precautionary motive: a firm should keep some cash for contingencies which would

arise or it should be in position to raise finances at a short period. The cash maintained for

contingency needs is not productive or it remains ideal. However such cash may be

invested in short period or low risk marketable securities which may provide cash as and

when necessary.

3. Speculative motive: the speculative motive relates to holding of cash for investing in

profitable opportunities as and when they arise. Such opportunities do not come in a regular

manner. These opportunities cannot be scientifically predicted but only conjectures can be

made about their occurrence.

Cash management needs strategies to deal with various faces of cash. Following are some

of its facets:

1. Cash planning: cash planning is a technique to plan and control the use of cash. A

projected cash follow statement may be prepared, based on the present business operations

and anticipated future activities. The cash inflows from various sources may be anticipated

and cash outflows will determine the possible uses of cash.

2. Cash forecasts and budgeting: a cash budget is the most important device for the

control of receipts and payments of cash. A cash budget is an estimate of cash receipts and

disbursements during a future period of time. It is an analysis of flow of cash in a business

over a future, short or long period of time.

The short term forecasts can be made with the help of cash flow projections. The

finance manager will make estimates of likely receipts in the near future and the expected

disbursements in that period. The long term cash forecasts are also essential for proper cash

planning. These estimates may be for three, four, five or more years. Long term forecasts

indicate company’s future financial needs for working capital. Capital projects, etc


-19-


Managing cash flows:

After estimating the cash flows, efforts should be made to adhere to the estimates of

receipts and payments of cash. Cash management will be successful only if cash collections

are accelerated and cash disbursements, as far as possible are delayed. The following

methods of cash management will help:

Methods of accelerating cash inflow

1. Prompt payment by customers

2. Quick conversion of payment into cash

3. Decentralized collections

4. Lock box system.

Methods of slowing cash outflows

1. Paying on last date

2. Payment through drafts

3. Adjusting payroll funds

4. Centralization of payments

5. Interbank transfer

These methods help the company to have a proper cash management and able to

meet day to day expenses.

Receivables management:

Receivables represents amount owed to the firm as a result of sale of goods or services in

the ordinary course of business. These are claims of the firm against its customers and form

part of its current assets. The receivables are carried for the customers. The period of credit

and extent of receivables depends upon the credit policy followed by the firm. The purpose

of maintaining or investing in receivables is to meet competition and to increase the sales

and profits.

Dimensions of Receivables Management:

1. Forming of credit policy


-20-


2. Executing the credit policy

3. Formulating and executing collection policy

1. Forming of credit policy: for efficient management of receivables, a concern must

adopt a credit policy. A credit policy is related to decisions such as credit standards,

length of credit period, cash discount and discount period etc.

2. Executing credit policy: after formulating the credit policy, its proper execution is

very important. The evaluation of credit applications and finding out the credit

worthiness of customers should be undertaken that is by collecting credit

information, credit analysis, credit analysis, credit decision, financing investments

in receivables and factoring.

3. Formulating and executing collection policy: the collection of amounts due to the

customers is very important. The concern should devise procedures to be followed

when accounts become due after the expiry of credit period. The collection policy

may be termed as strict and lenient. The collection policy should also devise the

steps to be followed in collecting overdue amounts. The objective is to collect the

dues and not to annoy the customer. The steps should be like sending reminder for

payments, personal request through telephone, personal visits to the customers,

taking help of collecting agencies and taking legal action.

Inventory Management

Every enterprise needs inventory for smooth running of its activities. It serves as a

link between production and distribution processes. There is generally, a time lag between

the recognition of a need and its fulfillment. The greater the time lag, the higher the

requirements for inventory. The unforeseen fluctuations in demand and supply of goods

also necessitate the need for inventory. It also provides a cushion for future price

fluctuations.

The investment in inventories constitutes the most significant part of current assets or

working capital in most of the undertakings. Thus it is very essential to have proper control

and management of inventories. The purpose of inventory management is to ensure


-21-


availability of materials in sufficient quantity as and when required and also to minimize

investment in inventories.

Objectives of Inventory Management

1. To ensure continuous supply of materials, spares and finished goods so that

production should not suffer at any time and the customers demand should also be

met.

2. To avoid both over stocking and under stocking of inventory

3. To maintain investments in inventories at the optimum level as required by the

operational and sales activities

4. To keep material cost under control so that they contribute in reducing cost of

production and overall costs

5. To eliminate duplication in ordering or replenishing stocks. This is possible with the

help of centralizing purchases.

Tools and Techniques of Inventory Management:

Effective inventory management requires an effective control system, for inventories. A

proper inventory control not only helps in solving the acute problem of liquidity but

also increases profits and causes substantial reduction in the working capital of the

concern. The following are the important tools and techniques of inventory

management and control:

1. Determination of stock levels.

2. Determination of safety stocks

3. Selecting a proper system of ordering for inventory

4. Determination of economic order quantity

5. ABC analysis

6. VED analysis

7. Inventory turnover ratio

8. Aging schedule of inventories

9. Preparation of inventory reports

10. Lead time

11. Perpetual inventory system

12. Just In time control system


-22-


Conclusions

As working capital management is very important in each and every business. It helps to

understand different concepts involved in it and various tools and techniques to analyze the

liquidity positions of each firm. It gives a basic idea of working capital cycle as cash is

converted to raw materials, raw materials to work in progress, working in progress to

finished goods, finished goods into sales, sales to debtors and again debtors to cash. It also

helps to analyze whether the investments should be of short term or long term investments

also.


-23-


Research Design

Every business needs adequate liquid resources in order to maintain day-to-day cash flow.

It needs enough cash to pay wages and salaries as they fall due and to pay creditors if it is

to keep its workforce and ensure its supplies.

Maintaining adequate working capital is not just important in the short-term. Sufficient

liquidity must be maintained in order to ensure the survival of the business in the long-term

as well.

Even a profitable business may fail if it does not have adequate cash flow to meet its

liabilities as they fall due. Therefore, when businesses make investment decisions they must

not only consider the financial outlay involved with acquiring the new machine or the new

building, etc, but must also take account of the additional current assets that are usually

involved with any expansion of activity.

Title of the study

“Effectiveness of Working Capital Management with special reference to MACOLAM

Engineering Private Limited”

Statement of Problem

The efficient management of Working Capital is one of the important factors for the

success of any organization. Management of Working Capital is one of the important areas

with regards to management of cost. Increase in working capital of the business increases

the profits. A systematic forecasting of working capital needs and proper management of

each of the components of working capital will be extremely beneficial for any company in

realizing the organization goals. Therefore there is a need to study the management of

working capital in an industry.


-24-


Scope of the Study

This study tries to cover all aspects of working capital management in MECOLAM. It

studies the important areas to establish a better control over all the components of working

capital in an industry.

This study also tries to identify optimum working capital requirements for MECOLAM and

various sources available for financing working capital in general.

Objective of the study

1. To understand working capital management.

2. To analyze the various items involved in working capital management.

3. To understand the trends exhibited by working capital over the period under the

study.

4. To evaluate the working capital position of the company using the tool of ratio

analysis

5. To suggest the ways and means to improve the management of working capital at

MECOLAM

Methodology of the study

The methodology that has been adopted while collecting the information and

interpretation in a meaningful way has been to collect information both from primary

and secondary sources:

Tools of data collection

Data had been collected from two sources one from report published by MECOLAM and

information has been collected from the executives &library of MECOLAM.

The data was processed according to the requirement of the study. They are presented in the

form of tables and graphs, where necessary percentages are drawn to generalize the finding,

interpretations is done through ratios based upon the analysis inferences are drawn and

conclusion made.

.


-25-


Research design:

The quality of the project work depends on the methodology adopted for the

study. Methodology in turn depends on the nature of the project work. The use of proper

methodology is an essential part of any research. In order to conduct the study scientifically

suitable methods and measures are to be followed.

Methodology is nothing but a plan or a strategy of the investigation process that

sets out to obtain solution to the study.

RESEARCH TYPE

Descriptive research;

Descriptive research is study of existing facts to come to a conclusion. This

research is carried out to analyze the past performance of the Mecolam Eng pvt Ltd.

A research is a method of and procedure for acquiring information needed to solve

the problem. A research design is the basis plan that helps in the data collection or analysis;

it specifies the type of information to be collected sources and data collection procedure.

Data sources: The data sources can be classified in to two categories:

Primary data

Secondary data

PRIMARY DATA: The data directly collected by the researcher with respect to the

problem under study, is known as Primary data. Primary data is also the first hand data

collected by the researcher for the immediate purpose of the study.

Sources of primary data: Having discussion with different department managers and

officers of the company to get general information about the company and its activities.

SECONDARY DATA:


-26-


Secondary data are statistics that already exist. They have been gathered not for

immediate use. This may be described as “those data that have been compiled by some

agency other than the users”.

Sources of secondary data:

Annual report

Company manuals

Text books

News papers

Internal sources

Limitations of the study

1. The secondary data collected was only for 5 years.

2. Analysis of data is made of the assumption that information so obtained is correct.

Operational definitions and concepts

Working capital:

The term Working Capital refers to the short-term funds required for financing the duration

of the operating cycle in a business,

Gross working capital:

Gross Working Capital is the firm’s investment in current assets.

Net working capital:

Net Working Capital is the difference between current assets and current liabilities.

Current Assets:

Current Assets are those assets which are easily converted into cash within a normal

accounting period or within the operating cycle.

Current liability:


-27-


Current Liabilities are those liabilities which are easily converted into cash for the specific

normal accounting period or within operating cycle for the disposal of current asset or for

the reconstruction of current liability.

Inventory:

Inventory includes stock of raw materials, spares and store, work in progress and finished

goods.

Receivable:

Receivable is a component of the current asset representing the claims of a firm against

customers as a result of credit sales also called debtors.

Liquidity:

It is the ability of a company to realize value in money. There are two dimensions of

liquidity; they are; the time necessary to convert the assets into money and the degree of

certainty associated with the conversion ratio or price realized for the asset.


-28-


COMPANY OVERVIEW

Mecolam Engineering Pvt Ltd is a Bangalore based AS9100B (including ISO 9001-2000)

certified company with DGQA & DGAQA registration. It has grown since 1982 into a well

established company with capabilities in diversified technologies. Currently Mecolam is

satisfying the needs of institutional customers in Defence & Non-defence areas. For

defence segment Mecolam can source all ttheir requirements. For non-defence segment it

provides solutions in Fiberglass, rubber moulded and fabricated component out of

insulating material.

Mecolam has state of the art facilities with dedicated employees and professionals striving

to produce good quality products and services to our customers on time every time.

QUALITY ASSURANCE

To ensure the quality of products, the company follows a standard quality control system

and maintains strict vigil throughout the production process. The company has promptly

inspected of the quality of raw materials used at our manufacturing unit. Further the

finished products are again scrutinized by our quality control inspection to prevent any sub

standard product to reach the hands of the customer. In addition to it the company takes

pride to acquire with the fact that the companies have not received any complaints from the

customers.

TEAM

The company thrives on the mutual efforts of highly committed team of engineers

technicians, quality, supervisors etc. they are matchless experts of their own fields who

within the sincere efforts have modeled our company into and overdriving entity of the

market. They have acquired sound knowledge and understanding of the industry and render

their services accordingly.

CUSTOMERBASE: Due to the fact that quality is tradition at company and to show the

tradition, the company having professional companionship of the country’s renowned

companies like that of BHEL, TATA, BIRLA etc.and many more.


-29-


PRODUCTS RANGE

The Company manufacturing and offering wide range of material handling conveyors

& subsystem manufacturing from high quality material, the range is known for its high

operational efficiency and long lasting functional services. The company products can be

classified in two types they are.

Defense Products

Fiberglass Products

The range has wide application area that includes fertilizers, food processing, automobiles,

flow mills, Defense Products. Distillates and many more fields. Beside designing &

manufacturing the company has also offering services relating to installations

commissioning as per client requirements.

Hence described earlier the following products are in the usual manufacturing range:

Defense Products

o Composites o Sheet metal components o Machined components o Electronic parts o Rubber molded parts o Pressed components o Injection molded parts o Rubber to metal molded parts o Aircraft wheel chocks o Aircraft sound proofing panels and bags o Hydraulic jacks o Pistons o Cockpit ladders o Fluid replenishing o Dynamometers o RADOMEs for MIG 29 Aircraft o Aircraft engine air intake blanking covers o Washers o Blanks o Tab washers o Clip retaining o Gaskets o Mechanism plates o Latches etc.


-30-



-31-


Fiberglass Products

Compared with other engineering materials, fiberglass is light but tough on weight to weight basis. Production of complex profiles is possible. Bulk production of any fiberglass products can be taken up. Mecolam has facilities for Resin Transfer Moulding Technology (RTM).

o RADOMEs o Bonnets o Bumpers o Grilles o Fenders o Snack trays o Wind deflectors o Body panels o Doors o Seats o Linings o Bath tub o Machine guards and covers o Medical equipment covers


-32-


Data Analysis

Introduction:

The term Financial Analysis and Interpretation refers to the process the process of

determining financial strengths and weaknesses of the firm by establishing a strategic

relationship between the components of financial statements and other operating data.

The purpose of financial analysis is to diagnose the information contained in financial

statements so as to judge the profitability and soundness of a firm. Financial analysis means

simplifications of financial data by methodical classification of data given in the financial

statements. Interpretation means explaining the meaning of and significance of data so

simplified. The analysis and interpretation of financial statements is used to determine the

financial position and results of operations as well.

Following are the common devices used to analyze the data. They are Ratio Analysis and

Trend Analysis

Ratio analysis:

The ratio analysis is one of the most powerful tools of financial analysis. It is the process of

establishing and interpreting various ratios (quantitative relationship between figures and

groups of figures). It is with the help of ratios that the financial statements can be analyzed

more clearly and decisions made from such analysis.

Significance or Importance of ratio analysis:

1. It helps in evaluating the firm’s performance: With the help of ratio analysis

conclusion can be drawn regarding several aspects such as financial health,

profitability and operational efficiency of the undertaking. Ratio points out the

operating efficiency of the firm i.e. whether the management has utilized the firm’s

assets correctly, to increase the investor’s wealth. It ensures a fair return to its

owners and secures optimum utilization of firms assets

2. It helps in inter-firm comparison: Ratio analysis helps in inter-firm comparison by

providing necessary data. An inter firm comparison indicates relative position. It


-33-


provides the relevant data for the comparison of the performance of different

departments. If comparison shows a variance, the possible reasons of variations may

be identified and if results are negative, the action may be initiated immediately to

bring them in line.

3. It simplifies financial statement: The information given in the basic financial

statements serves no useful purpose unless it s interrupted and analyzed in some

comparable terms. The ratio analysis is one of the tools in the hands of those who

want to know something more from the financial statements in the simplified

manner

4. It helps in determining the financial position of the concern: Ratio analysis

facilitates the management to know whether the firm’s financial position is

improving or deteriorating or is constant over the years by setting a trend with the

help of ratios The analysis with the help of ratio analysis can know the direction of

the trend of strategic ratio may help the management in the task of planning,

forecasting and controlling.

5. It is helpful in budgeting and forecasting: Accounting ratios provide a reliable data,

which can be compared, studied and analyzed. These ratios provide sound footing

for future prospectus. The ratios can also serve as a basis for preparing budgeting

future line of action.

6. Liquidity position: With help of ratio analysis conclusions can be drawn regarding

the Liquidity position of a firm. The liquidity position of a firm would be

satisfactory if it is able to meet its current obligation when they become due. The

ability to met short term liabilities is reflected in the liquidity ratio of a firm.


-34-


Limitations of Ratio Analysis

The ratio analysis is one of the most powerful tools of financial management. Though ratios

are simplest calculate and easy to understand they suffer from some serious limitations:

1. Limited use of a single ratio: a single ratio usually does not convey much of a sense,

to make a better interpretation a number of ratios have to be calculated which is

likely to confuse the analyst than help him in making any meaningful conclusion.

2. Lack of adequate standards: there are no well accepted standards or rules of thumb

for all ratios which can be accepted as norms. It renders interpretation of the ratios

difficult.

3. Inherent limitations of accounting: like financial statements, ratios also suffer from

the inherent weakness of accounting records such as their historical nature ratios of

the past are not necessarily true indicators of the firms.

4. Change of accounting procedure: Change in accounting procedure by a firm often

makes ratio analysis misleading.

5. Window dressing: financial statements can easily be window dressed to present a

better picture of its financial and profitability position to outsiders. Hence one has to

be very careful in making a decision from ratios calculated from such financial

statements.

6. Uncomparable: not only industries differ in their nature but also the firms of the

similar business widely differ in their size and accounting procedures etc. It makes

comparison of ratios difficult and misleading. Moreover, comparisons are made

difficult due to differences in definitions of various financial terms used in the ratio

analysis.

7. Price level changes: while making ratio analysis no consideration is made to the

changes in price levels and this makes the interpretation of ratio invalid.


-35-


8. Ratios no substitutes: ratio analysis is merely a tool of financial statements. Hence

ratios become useless if separated from the statements from which they are

computed.

ANALYSIS OF WORKING CAPITAL MANAGEMENT

The chapter contains the analysis of working capital management. Working

capital analysis is quite important for smooth running of the business. Here the working

capital position is analyzed through the ratio analyze the working capital management

the ratio is simple arithmetic expression of the relationship of the indication quotient of

two mathematical expressions. In simple language, ratio can be worked out by dividing

one number by another.

Principles of working capital

Concepts

There are two concepts of working capital first is gross working capital and

second one is net working capital.

Gross working capital

Gross working capital refers to the firm’s investment in current assets. Current

assets are the assets which can be converted into cash within an accounting year and

include cash, short-term securities, debtors, bills receivable and stock.

Net working capital

Net working capital refers to the difference between current assets and current

liabilities are those claims of out sider which are expected to mature for payment within

an accounting year and include creditors, bills payable and outstanding expenses,

networking capital can be positive or negative. A positive working capital will be when

current assets exceed current liability. A negative working capital occurs when current


-36-


liabilities are in excess of current assets.

The gross working capital concept focuses attention on two aspects of current

assets management:

1. How to optimize investment in current assets?

2. How should current asset be financed?

Excessive investment in current asset should be avoided because it impairs the

firm’s profitability as the idle investment earns nothing on the other hand inadequate

amount of working capital can threaten solvency of the firm because of its inability to

meet its current obligation.

The net working capital is a qualitative concept. It indicates the liquidity

position if the firm and suggest the extent to which working capital needs may be

financed by permanent source concept also covers the question of judicious mix of long

term and short term funds for financing current asset. For every firm there is a minimum

amount if nit working capital which is permanent. There fore a portion of the working

capital should be financed with the permanent sources of funds such as equity share

capital, debentures long term debt, preference shares capital and retain earning.

Management must decide the extent to which current asset should be financed with

equity capital and or borrowed capital.

In summary it may be emphasized that both gross and net concepts of working

capital are equally important for the efficient management of working capital. There is

no precise way to determine the exact amount of gross or nit working for any firms. The

data and the problem of each company should be analyzed to determine the amount of

working capital.

Working capital management:

Working capital management of an organization assumes greed significance

in a competitive environment without a well planned working capital system, the

operation of the organization is very difficult, the study of working capital of an

institution is a use full tool for solving so many problems in that area.


-37-


Working capital may be regarded as the life blood of a business. It is the capital

required for meeting the day to day operations of the business. It should be adequate

neither too lower too high. If an organization has too much working capital that what is

actually needed. It represents block up of capital. If it is too low production activities

will be held up. So working capital has greater significance in the life of business.

Generally working capital is the difference between current asset and liabilities.

Analysis of working capital position enables a firm to study, whether an organization

can meet its short term obligations with its current assets or not in short it is the capital

with which the business is worked over.

ROLE OF FINANCIAL MANAGER IN WORKING CAPITAL

MANAGEMENT

1. Working capital management requires must of the finance manger time as it

represent a large position of investment is assets.

2. Working capital management requires much of the finance management time as it

represent larger position of investment in assets.

3. Action should be taken to curtail unnecessary investment in current assets.

4. All precautions should be taken for the effective and efficient management of

working capital.

5. Larger firms have to manage their current assets and current liabilities very

carefully and should see that the work should be done properly in order to achieve

predetermined organization goals.

6. The financial manger should pay special attention to the managements of

current assets on continuing basis.


-38-


DATA ANALYSIS AND STASTICAL TOOLS

1.CURRENT RATIO

Current ratio may be defined as the relationship between the current assets and current

liabilities. This ratio is also known as working capital ratio. Is a measure of general

liquidity and is most widely used to make the analysis so a short term financial analysis

position or liquidity of a firm.

Current ratio = Current assets

Current liabilities

TABLE – 1 CURRENT RATIO

Year Current assets Current liabilities Current ratio

2005 36847984 35698448 1.03

2006 36153263 27942343 1.29

2007 92809547 78548588 1.18

2008 103181804 79813859 1.29

2009 145296787 101441134 1.43


-39-


CHART – 1 CURRENT RATIO

Interpretation:

The above table and graph shows that current ratio for the years 2005-2009

are 1.03, 1.29, 1.18, 1.29 and 1.43 respectively. This shows that there has been a

proportionate increase in the current assets over current liability. By this we can

interpret that the current ratio is moving towards satisfactory position.


-40-


2. LIQUID RATIO/ QUICK RATIO/ ACID TEST RATIO

Quick assets are also known as acid test or liquid ratio is a more rigorous test

of liquidity than the current ratio. The term “liquidity” refers to ability of a firm to

pay its short-term obligation as and when they become due. Quick ratio may be

defined as a relationship between the quick/liquid assets and current or liquid

liability. Investment are prepaid expenses are not liquid assets.

ACID TEST RATIO = LIQUID ASSETS

CURRENT LIABILITIES

TABLE – 2 QUICK RATIOS

Year liquid assets Liquid assets Current liabilities Liquid ratio

2005 105365 35698448 0.0030

2006 328194 27942343 0.0118

2007 766612 78548588 0.0078

2008 2132360 79813859 0.0267

2009 2161488 10144134 0.0213


-41-


CHART -2 QUICK RATIOS

Interpretation:

The above table and graph shows that liquid ratio for the years 2005-2009 are

0.003, 0.011, 0.007, 0.026 and 0.028 respectively. This shows that there has been a

proportionate increase in the liquid assets and liquid liabilities. By this we can interpret

that the liquid ratio is partly moving towards satisfactory position. Generally it is a non

satisfactory position.


-42-


3. INVENTORY TO WORKING CAPITAL RATIO

Inventory to working capital ratio is the ratio is usually expressed as a percentage. This ratio indicates the proportion of the working capital is tied up in the inventories stocks.

Inventory to working capital ratio = Inventory

Working capital

TABLE – 3 INVENTORY TO WORKING CAPITAL RATIO

Year Inventory Working capital Ratio

2005 27631942 1149536 24.04

2006 16588890 8210920 2.02

2007 30200092 14260959 2.12

2008 35030069 23367945 1.50

2009 84476591 43855653 1.93


-43-


CHART – 3 INVENTORY TO WORKING CAPITAL RATIO

Interpretation:

The above table and graph shows the ratio of inventory over working capital

for the year 2005-2009. They are 24.04, 2.02, 2.12, 1.50 and 1.93 respectively. This

shows that the company’s inventory has been increasing year by year except during the

year 2003, where it has come down to 1,65,88,890, but the working capital has been

gradually increased from 2005-2009. By this we can interpret that the inventory to

working capital ratio in a better position.


-44-


4. CASH TURN OVER RATIO

CASH TURN OVER RATIO = NET ANNUAL SALES

CASH

TABLE – 4 CASH TURN OVER RATIO

Year Net annual

sales

Cash Cash turn over

ratio

2005 48677738 105365 854.64

2006 178725638 328194 2802.35

2007 148355173 766612 2232.38

2008 252906971 2132360 3786.88

2009 188641488 2161488 1846.64


-45-


CHART – 4 CASH TURN OVER RATIO

Interpretation:

From the above table and graph we can interpret that the cash resources of the

enterprise are not effectively utilized because it is less than the standard or ideal cash

turn over ratio i.e. less than 10%


-46-


5. WORKING CAPITAL TURN OVER RATIO

This is also known as working capital leverage ratio. This ratio indicates whether the working capital has been efficiently utilized or not in making sales. It expresses the calculated as under:

Working capital turn over ratio = Net annual sales

Working capital

TABLE – 5 WORKING CAPITAL TURN OVER RATIO

Year Net annual

sales

Working

capital

Working

capital

turnover ratio

2005 48677738 1149536 42.35

2006 178725638 8210920 21.77

2007 148355173 14260959 10.40

2008 252906971 23367945 10.82

2009 188641488 43855653 4.30


-47-


CHART – 5 WORKING CAPITAL TURN OVER RATIO

Interpretation:

The ratio indicates the efficient or inefficient utilization of the working capital of

the company. Higher the ratio, lower the investment in working capital and the greater

are the profit. Lower the ratio, it would be other way.

From the above table and graph we can interpret that there is an inefficiency of

the management in the utilization of working capital. Since there in a gradual decrease in

the working capital turn over ratio of the company from 2005-2009. I.e. in form 42.35 to

4.30.


-48-


6. INVENTORY TURN OVER RATIO

This ratio establishes the relationship between the cost of goods sold or sales

during a given period and the average amount of stock carried during the

period.

Inventory turn over ratio = Sales

Average stock

TABLE – 6 INVENTORY TURN OVER RATIO

Year Inventory turn over ratio

2005 7.38

2006 8.08

2007 6.34

2008 7.75

2009 3.16

CHART – 6 INVENTORY TURN OVER RATIO


-49-


Interpretation:

From the above table and graph we can analyzes that the inventory that the

inventory turnover ratio is very less compared to that of previous years.

By this we can interpret that the company’s sales from its stock is very less which

indicates a non-satisfactory position.

7. DEBTORS TURN OVER RATIO


-50-


It indicates the number of times average debtors (receivables) are turned over during a year.

It is a ratio between Net Sales and Average debtors. It indicates the efficiency of credit

management. Higher the debtors’ turnover ratio higher will be the efficiency.

Debtors turn over ratio = Total sales

Debtors

TABLE – 7 DEBTORS TURN OVER RATIO

Year Sales Debtors Debtors turn

over ratio

2005 48677738 6033662 8.068

2006 178725638 7829764 22.83

2007 148355173 32934250 4.50

2008 252906971 48077941 5.26

2009 188641488 39315856 4.80


-51-


CHART – 7 DEBTORS TURN OVER RATIO

Interpretation:

From the above table and graph we can interpret that the debts utilized by the

company because the number of times the debt has been collected by the company in

decreasing, i.e. in 2006 it was 22.83 times and goes on decreasing to 4.5, 5.26 where as

in 2009 it was only 4.80 times.

8. DEBTORS TO CURRENT ASSETS RATIO


-52-


Debtors to current assets ratio = Debtors X 100

Current assets

TABLE – 8 DEBTORS TO CURRENT ASSETS RATIO

Year Debtors Current assets Percentage

2005 6033662 36847984 16.37

2006 7829764 36153263 21.66

2007 32934250 92809547 35.49

2008 48077941 103181804 46.60

2009 39315856 145296787 27.06

CHART- 8 DEBTORS TO CURRENT ASSETS


-53-


Interpretation:

From the above table and graph we can interpret that the percentage of

company’s debt. Has been increasing in initial stage has been decreased 46.60 %{ 2008}

to 27.06% {2009}, which indicates the company’s careless debt collection.

9. WORKING CAPITAL TO NET WORTH RATIO


-54-


Working capital to net worth = Working capital X 100

Net worth

TABLE – 9 WORKING CAPITAL TO NET WORTH RATIO

Year Working

capital

Net worth Working

capital turn

over ratio

2005 1149536 14388913 7.99

2006 8210920 15203090 54.01

2007 14260959 20803793 68.55

2008 23367945 26990495 86.58

2009 43855653 39338637 111.48


-55-


CHART – 9 WORKING CAPITAL TO NET WORTH RATIO

Interpretation:

The above table and graph shows the ratio of working capital to net worth for the

year 2005-2009 are 7.99, 54.01, 68.55, 86.58 and 111.48. This shows that there has been

a gradual increase in working capital as well as the net worth of the company. By this we

can interpret that there has been a positive mode towards company’s working capital to

net worth ratio.


-56-


10. AVERAGE DEBTORS COLLECTION PERIOD

The Debtors / Receivable Turnover ratio when calculated in terms of days is known as Average Collection Period or Debtors Collection Period Ratio.

The average collection period ratio represents the average number of days for which a firm has to wait before its debtors are converted into cash.

AVERAGE DEBTIRS COLLECTION PERIOD = No. of days in a year

Debtor turn over ratio

TABLE – 10 AVERAGE DEBTORS COLLECTION PERIOD

YEAR No of days in

a year

Debtors

Turnover

ration

Period

2002 365 8.068 45.24

2003 365 22.83 15.99

2004 365 4.50 81.11

2005 365 5.26 69.39

2006 365 4.80 76.04


-57-


CHART – 10 AVERAGE DEBTORS COLLECTION PERIOD

Interpretation:

From the above table and graph we can interpret that the actual period of credit

allowed by the company is increasing i.e. during 2007 it was 81.11 which shown the

highest period of credit allowed where as during the year 2009 it is 76.04, which shows

the second highest. I.e. there is an inefficient credit collection period by the company.


-58-


11. CURRENT ASSET TURN OVER RATIO

This gives the relationship between net sales and current assets.

Current asset turn over ratio = sales

Current assets

TABLE – 11 CURRENT ASSET TURN OVER RATIO


-59-

Year SalesCurrent

assets

Ratio

2005 48677738 36847984 1.32

2006 178725638 36153263 4.94

2007 148355173 92809547 1.60

2008 252906971 103181804 2.45

2009 188641488 145296787 1.30


CHART – 11 CURRENT ASSET TURN OVER RATIO

Interpretation:

This ratio indicates the contribution of current asset to sales. There is no standard

current asset turnover ratio. Yet the inference is that a high current asset turn over ratio

is an indication of a better utilization of current asset. On the other hand a low current

asset turn over ratio suggests that the current asset have not been utilized effectively.

12.Cash in current asset Ratio


-60-


Cash in Current asset ration= Total cash

Total current assets

TABLE – 12 CASH IN CURRENT ASSET RATIO

YEAR Total Cash Total Current

Assets

Ratio

2005 105365 36847984 2.86

2006 328194 36153263 9.08

2007 766612 92809547 8.26

2008 2132360 103181804 0.021

2009 2161488 145296787 1.49

CHART – 12 CASH IN CURRENT ASSETS RATIO


-61-


Interpretation:

From the above table and graph we can interpret that the percentage of cash

utilized under current asserts is very less, I.e. 2.86, 9.08, 8.26, 0.21, 1.49 which indicates

inefficient cash utilization.

13. STOCK TO CURRENT ASSETS

This gives the relationship between the stock and current assets.


-62-


Stock to current Assets ratio = Stock X 100

Current assets

TABLE – 13 STOCK TO CURRENT ASSETS

YEAR Stock Current

Assets

Average

2005 276631942 36847984 74.99%

2006 16588890 36153263 45.88%

2007 30200092 92809547 32.54%

2008 35030069 103181804 33.95%

2009 84476591 145296787 58.14%

CHART – 13 STOCK TO CURRENT ASSETS


-63-


Interpretation:

We can interpret that the percentage of stock utilized by the company in more in

2009 i.e. 58.14 compared to that of previous two years. It indicates that the company’s

stock utilization is more which generally indicates an unhealthy business.

CHANGES IN WORKING CAPITAL OF 2008-09


-64-


PARTICULARS 2008 2009 INCREASE DECREASE

Current assets

Inventories 35030069 84476591 49446522

Sundry debtors 42643178 35988533 6654645

Cash and bankBalance

2132360 2161488 29128

Other currentAssets

1643023 5835756 4192733

Loans and advances 21733174 16834419 4898755

{A} TOTALCURRENT ASSETS

103181804 145296787

Current liabilities 79813859 101441134 21627275

{B}TOTALCURRENTLIABILITIES

79813859 101441134

NET WORKINGCAPITAL {A-B}

23367945 43855653

INCREASE INWORKING CAPITAL

20487708 20487708

43855653 43855653 53668383 53668383

FINDINGS


-65-


Working capital management is an essential part of financial management. Here

we studied various ratios relating to measurement of the working capital such as current

ratio, quick ratio, debtor’s turnover etc from 2005-2006 to 2008-2009.The major

findings are given below

Table 1 and chart 1 show about the current ratio, where there is proportionately

increase in the current assets over current liabilities.

Table 2 and chart 2 shows Liquid ratio what is partly increasing i.e. in liquid assets over

liquid liabilities. There is fluctuating position.

Table 3 and chart 3 shows Inventory over working capital for the year 2005-2009. They

are 24.04, 2.02, 2.12, 1.50 and 1.93 respectively. This shows that the company’s

inventory has been increasing year by year except during the year 2003, where it has

come down to 1,65,88,890.

Table 4 and chart 4 shows cash turn over ratio, which is the ratio is less than 10%.

Table 5 and chart 5 shows there is a gradual decrease in working capital turn over ratio

of the company from 2002-2006 i.e. from 42.35 to 4.30.

Table 6 and chart 6 shows Inventory turn over ratio. It is clearly stated that only during

2006 company’s inventory turn over ratio is said to be effectively utilized which is

shown 8.08, where as during the year 2009 it is 3.16.

Table 7 and chart 7 shows debts has been ineffectively utilized by the company because

the number of times the debt has been collected by the company is decreasing, that is

2006 it was 22.83 times where as in 2009 it was only 4.80.

Table 8 and chart 8 shows debts collection has been fluctuating year by year.

Table 9 and chart 9 shows working capital to net worth ratio, which is gradually

increasing i.e. working capital as well as net worth of company.


-66-


Table 10 and chart 10 shows actual period of credit allowed by the company, which was

increased during the year 2007, that is 81.11 which shows the highest and in 2009 it is

76.04 the second highest.

Table 11 and chart 11 shows, current asset turn over ratio in 2006 is high i.e. 4.94 and

gradually decreases.

Table 12 and chart 12 shows, the percentage of cash utilized under current assets is very

less.

Table 13 and chart 13 shows, the stock utilization is comparatively more from previous

years.

SUGGESTION:


-67-


The study conducted is to analyze the working capital needs of “MECOLAM

ENGINEERING PVT LTD” Ltd from 2005 to 2008.The findings of the study are quit

interesting. The study is done in the fields of Current ratio, Quick ratio, Debtors

turnover, Inventory turnover, Working capital turnover etc.

Avoid unnecessary liability to make current ratio of 2:1 with equal or more but

not less than the ideal ratio. Company should increase in working capital ratio

year by year.

Company can try to improve their inventory management by calculating the

stock quantity serial of each major type if material at frequent internal and

placing the orders accordingly so that the unnecessary blockage of funds in

inventory can be avoided.

Average collection period of the organization should be given more attention a

strict credit policy should be adopted.

The firm should take steps to recover the debts.

Company should keep minimum balance of cash and if more cash is kept it will

be idle.

Proper control should be exercised at all levels of its operation, through which

the cost can be reduced considerably.

The marketing department has to think of undertaking promotional activities to

increase the turn over which will help to reduce the increased investment in

finished stock, which is a component of inventory.

Sweep out the idle time both in the operation of men and machine.

CONCLUSIONS


-68-


The project study includes the over all view of the working capital management

operations. The study reveals the current asset financing at the Mecolam engineering pvt

limited. Hence for analyzing the data, accounting ratios have been used. It discloses the

relevant information’s about different area of working capital management.

This study report includes the working capital cycle and analysis which reveals the

raw material inventory period, work in progress period and finished goods storage

period.

Mecolam Engineering Private Ltd PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED


-69-


Particulars Schedule As at31-03-09

As at31-03-08

INCOMESales and Related IncomeLess: Excise Duty

Other Income

EXPENDITURECost of MaterialsExcise DutyOther ExpendituresInterestDepreciation

PROFIT/(LOSS) BEFORE TAXLess: Provision for TaxationCurrent taxIncome tax relating to earlier years(Net)Deferred TaxFringe Benefit Tax

PROFIT/(LOSS) AFTER TAXAdd: Balance brought forward from previous year

BALANCE CARRIED TO BALANCE SHEET

12

13

14

188,641,488 21,707,765166,933,72079,455167,013,185

82,035,649408,28766,420,407271,6171,192,756

150,326,716

16,684,4695,950,000326,367(317,994)391,693

10,334,40316,202,306

26,536,709

26,537,409

252,863,88434,784,926

218,078,958195.748218,274,706

122,442,627(175,001)85,527,794561,208,955

209,004,431

9,270,2753,650,000_(679,026)--

6,299,3019,903,005

16,202,306

31ST MARCH 2009

Mecolam Engineering Private Ltd


-70-


BALANCE SHEET AS AT 31ST MARCH, 2009

Particulars Schedule As at31-03-09

As at31-03-08

I. SOURCES OF FUNDSShares Holder’s Funds-Capital-Reserves & Surplus

Loan Funds -Secured Loan

Deferred Tax Liability(Net)

IIAPPLICATION OF FUNDSFIXED ASSETSGross BlockLess: DepreciationNet BlockA: Current Assets, Loans & advances:InventoriesSundry DebtorsCash & Bank BalancesOther Current AssetsLoans & Advances

B:Less: Current Liabilities & ProvisionsLiabilitiesProvisions

Net Current Assets (A-B)

Accounting Polices & Notes to Accounts

12

3

4

56789

1011

15

9,000,07026,537,4092,898,160902,998

39,338,637

15,896,1617,722,973

7,873,188

84,476,59135,988,5332,161,4885,835,75616,834,419145,296,787

101,441,13412,390,204113,831,338

31,465,449

39,338,637

9,000,07016,203,006566,4271,220,992

26,990,495

16,231,853 7,026,501

9,205,352

35,030,06942,643,1782,132,3601,643,02321,733,174103,181,804

79,813,8595,582,80285,396,661

17,785,143

26,990,495

BIBLIOGRAPHY:


-71-


1) FINANCIAL MANAGEMENT : Prasanna Chandra

2) FINANCIAL MANAGEMENT : I.M. PANDEY

3) MANAGEMENT ACCOUNTING : S.N.Maheswari

WWW.MECOLAM.COM

WWW.GOOGLE.COM


-72-

http://WWW.GOOGLE.COM/

Sri Working Capital FINAL

Documents

east point

mecolam eng

variable working

special working

working capital

adequate working

inadequate

gross working