A Project Report on WORKING CAPITAL MANAGEMENT (RAJASHREE CEMENT, MALKHED) A Project Report Submitted To The “ ” In Partial Fulfillment For The Award Of Degree In Master of Business Administration Submitted By Reg. No. UNDER THE GUIDANCE OF Internal Guide External Guide Mr.R. Annadurai, B.Com., FICWA, Manager (Accounts) Rajashree Cement, Malkhed. Institute/University Name: 2010-11 ACKNOWLEDGEMENT
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A
Project Report
on
WORKING CAPITAL MANAGEMENT
(RAJASHREE CEMENT, MALKHED)
A Project Report Submitted To The “ ” In Partial
Fulfillment For The Award Of
Degree In
Master of Business Administration
Submitted By
Reg. No.
UNDER THE GUIDANCE OF
Internal Guide External Guide
Mr.R. Annadurai, B.Com., FICWA,
Manager (Accounts)
Rajashree Cement, Malkhed.
Institute/University Name:
2010-11
ACKNOWLEDGEMENT
It is my privilege to express my gratitude to Mr. P.K. Jain, Joint Executive President - HR for
giving me an opportunity to carry out my project work in Rajashree Cement.
I would like to extend my sincere thanks to Mr. V.A. Yaligar, GM - HR for providing all the help
to complete my project work.
My sincere thanks to Mr. R. Annadurai, Manager (Accounts) for his continuous support and
guidance in completion of my Project.
My special thanks to Mr. Basavraj Kalligudd, Dy. Manager - HR for his continuous guidance
to complete my project.
I would like to thank my faculty for his guidance to get this placement.
I am extremely grateful to all the staff of HR Dept, Accounts Dept and Time Office for their
valuable insight and suggestion and sparing their precious time to interact with me.
Finally, I would like to thank my family and friends who have encouraged me throughout my
Project Work.
INTRODUCTION
Finance is a key factor and the same is so essential to the business just like blood
circulation required for human body to maintain the life smoothly.
Financial management involves managerial activities concerned with the acquisition and
running of the business. Finance function does with procurement of money taking into
consideration of today as well as future needs as it is required for purchase of
machinery, raw materials, to pay salaries and wages and also for day to day expenses.
Working capital is the process of planning and controlling the level of mix of the current
assets of the firm as well as financing of these assets. Specifically, working capital
management requires the financial manager to decide what quantum of cash & bank,
other liquid assets, debtors and inventories of the firm are required to be held at any
point of time. In addition, the finance manager must decide how these current assets
are to be financed
The finance manager has to analyze the following before taking the decision.
• How should the firm manage its cash?
• To whom should the firm grant credit?
• How much inventory should the firm keep?
• What should be the composition of the firm’s current debt?
1.2. Statement of the Problem:
Working capital management is an important function of finance department of the
organization while managing current assets for two important factors of liquidity and
profitability. The excess working capital results in deterioration in profits and inadequate
working capital results in illiquidity risk so this study is undertaken to know what extent
the Grasim Industries Limited is successful in trade off liquidity and Profitability.
1.3. Objectives of the Study:
To study and interpret the financial statement of Rajashree Cement which is a Unit
of Grasim Industries Limited.
• To interpret the inventory statement.
• To study the existing system of working capital management.
• To study overall sources and applications of working capital fund
• To know the strengths and weakness of Grasim Industries Limited.
• To suggest if necessary the methods by which future improvement may be made
in its management of working capital.
• To calculate the working capital ratio of Rajashree Cement.
1.4. Scope of the Study
The role of working capital management in industry indicates the effective utilization and
control of net current assets. Proper maintenance of working capital in industry is very
important. Finally the management of working capital has become a great recognition
as the most important function of every modern business enterprise.
Financial decision includes
• Inventory decision
• Financing decision
• Liquidity decision (Working Capital Management)
So an attempt has been made to identify the optimum working capital requirements for
Rajashree Cement and it has been observed that the manners in which they utilize the
current assets are in a better way.
1.5. Research methodology:
Design of the Study
The study was descriptive in nature so no attempt was made to test any hypothesis.
Quantitative data’s were used from verifying the assumptions and bringing this study on
working capital management.
Data Collection Sources
The major source of information for this study is secondary data, the information were
collected through various Journals, books, Internet and magazines, also various
literatures were reviewed for capitalizing them for the project report.
During my in plant training, I have visited Accounts Department and HR Department and
have had interactions with the executives and staff. The impression carried out during
the discussion and observation have helped a lot in understanding the manufacturing
system of cement. The quantitative data generated was then used to present a study in
comprehensive manner.
To gather information on the topic a study on working capital management and various
ratios were used. For this purpose, Balance Sheet, Profit & Loss Account and Financial
Statement were analyzed.
1.6. Tools and Technique:
Here certain statistical tools and techniques are used to draw conclusion on working
capital management.
The main techniques that are used in the study are
• Working Capital Ratio
• Efficiency Ratio
• Structure and Health Ratio
• Working Capital Leverage
• Comparative Analysis and
• Regression Analysis Method
1.7. Limitation of the Study:
The first limitation of the study was the time constraint. It was not possible to make
an extensive study with in the available time to cover period of past five financial
years.
• Figures for the analysis are taken from the annual reports. So all the limitations
of these statements will apply to the study.
• Major part of the work is concerned with financial data adequate data could not
be collected because of time constrain.
• The study does not attempt to make a comparative analysis with any
benchmarked industry norms.
• The study reveals the finding of the past and not reflecting the future.
2. THEORETICAL BACKGROUND OF WORKING CAPITAL MANAGEMENT
Financial Management:
Financial management is concerned with the overall decision making in general and
with the management of economic resources in particular. In other words it can be
defined as the management of cash and fund flow which deals with financial decision
making of firm.
Working capital management is concerned with the problems that arises to manage the
current assets, current liabilities and interrelation that exists between them. Current
assets refer to those assets which can be converted into cash within one year. The
major current assets are cash, inventories, bill receivable, and debtors.
Current liabilities refer to those liabilities which have to be paid within one year. The
major current liabilities are bills payable, creditors, outstanding expenses, bank over
draft etc.
The goal of working capital is to manage the current assets and current liabilities in a
better way. If a firm is not in a position to manage the current assets and current
liabilities, it may become insolvent and may be even forced into either for bankruptcy or
for even closure.
Introduction of Working Capital Management
A business unit or an industrial establishment require two types of finance namely, long
term finance and short term finance. Long term finance required to meet capital
expenditure requirements. Short term finance or funds are needed to meet the day to
day requirements of a business unit. The exploitation of capital assets can be had only
by working capital.
It lubricates the wheel of fixed assets. This facilitates the industrial units to have
sustained business. Working capital may be regarded as the life blood of a business.
Its effective provision can do much to ensure the success of a business while its in-
efficient management can lead not only to loss but also to ultimate down fall of what
otherwise might be considered as a promising concern.
Meaning and Definitions:
Working capital management or administration of all aspects or working capital, which
manages the current assets and current liabilities in such a way that a satisfactory level
of working capital is maintained. Net working capital is commonly defined as the
difference between current assets and current liabilities.
Net working capital can be alternatively defined as the part of the current assets which
are financed with long term funds since current assets exceeds the current liabilities, the
excess must be financed with long term funds.
According to Smith
“Working capital management is concerned with the problems that arise in attempting to
manage the current assets and liabilities; and the inter relationship that exist between
them”.
According to Weston and Brigham
“Working capital refers to a firm’s investment in short term assets – cash, short term
securities accounts receivables and inventories”.
Basic Objective of Working Capital Management
These basic objectives of working capital management the firms working capital in such
a way that a satisfactory level of working capital (it neither excessive nor inadequate
working capital) is maintained.
This is necessary because if the working capital is excessive or large the liquidity
position adversely affected, as funds would not doubt, improve, but its profitability would
be adversely effected, as funds would remain idle. Conversely if the working capital is
too small, the profitability of the firm may improve but the liquidity position of the firm
would be adversely affected.
Need for Working Capital
Every business requires some amount of working capital. The necessity of working
capital arises because of the time gap between the production and realization of cash
from sales. Working capital is needed for the following purposes:
• For the purchase of raw materials, components and spares.
• To pay wages and salaries
• To incur day to day expenses
• To provide credit facilities to the customers.
• To maintain the inventories of raw materials, work in progress and finished stock.
Concept of Working Capital
There are two concepts of working capital. They are
• Gross Working Capital
• Net Working Capital
1. Gross Working Capital:
Refers to the firm’s investment in current assets. Current Assets are the assets, which
can be converted into cash within a short period say an accounting year or operating
cycle and includes cash, short term securities, debtors (accounts receivables or book
debts) bills receivable and stock (inventory). Gross working capital points to the
arranging of funds to finance current assets.
2. Net Working Capital:
Refers to the difference between current assets and current liabilities, current liabilities
are those claims of outsiders, which are expected to mature for payment within
accounting years and include creditors (accounts payable), bills payable and
outstanding expenses. Net working capital can be positive or negative. A positive
networking capital will arise when current assets exceed current liabilities.
Sources of Working Capital
Among the various sources available for financing working capital needs, finance
manager has to select the best suitable source depending on working capital need of
company.
Long Term Sources:
• By issue of shares
• By issue of debentures
• Ploughing back of profits
• Long term loan
Short Term Sources:
They are classified into
Internal
• Withdrawing the depreciation fund.
• Using the renouncement for taxation
• Postponement of payment accrued expenses.
External
• Bank Loan
• Trade Credit
• Bills of Exchange
• Government Assistance
• Public deposits (Short Term)
The need of working capital is increased because of rise in prices of relative inputs. On
the other hand, the government and monetary authorities play their own role to curd the
malice in period of inflation. The control measures often take the firm of dear money
policy and restrictions credit.
Financing of additional working capital in such an amusement becomes a real problem
to finance manager of a concerned unit. Commercial banks play the most significant
role in providing working capital finance, particularly in Indians context.
In view of mounting inflation, RBI has been taking up certain social measures to check
the money supply in the economy. The balancing need has to be managed either by
long term borrowings or by issuing equity or by earning sufficient profits and retaining
the same of coping with the additional need on working capital requirements. The first
choice before a finance manager is banks that can provide a part of additional working
capital so as to take the long term sources of finance.
Measures to be adopted for a sound Working Capital Management
For a sound management of working capital, a concern should adopt the following
measures;
• Budget its cash flow
• Control its debtors
• Control its creditors
• Control its stock
• Avoid over borrowing
• Avoid over investment in fixed assets
• Determine the financing mix
CASH MANAGEMENT
Cash management is one of the key areas of working capital management as cash is
both beginning and the end of the working capital cycle – cash, inventories, receivables
and cash.
Nature:Cash is the medium of exchange for purchase of goods and services, and for discharging liabilities. Cash has been used in two senses.
• Narrow Sense: Cash covers currency and generally accepted equivalents of
cash. E.g.: Cheques, demand drafts and bank demand deposits.
• Broad Sense: It includes Bank time deposits and marketable securities
Objectives of Cash Management
Inadequate cash balance will affect the liquidity of the firm. Hence there is need to
maintain balance between profitability and liquidity. So there should not be excess cash
or inadequate cash
• To meet cash payment needs
• To maintain minimum cash balance
Possible motives for holding cash
• Transaction motive
• Precautionary motive and
• Speculative motive
Aspects of cash management can be examined under these
• Cash inflows
• Cash outflows
• Cash flow within the firm and
• Cash balance held at the point of time.
Facets of Cash Management Strategies:
• Cash planning
• Cash flows management
• Determination of optimum cash balance, and
• Investment of surplus
3. COMPANY PROFILE
INTRODUCTION TO GRASIM INDUSTRIES LIMITED
The Aditya Birla Group is India’s first multinational company. Global in vision, rooted in
Indian values, the group is driven by a performance ethic pegged on value creation for
its multiple stakeholders. A US$ 29.2 billion conglomerate, with a market capitalization
of US$31.5 billion, it is anchored by an extraordinary force of 130000 employees
belonging to over 25 different nationalities. Over 24 percent of its revenues flow from its
operations across the world. The Group’s products and services offer distinctive
customer solutions. Its 74 state of the art manufacturing units and sect oral services
span India, Thailand, Laos, Indonesia, Philippines, Egypt, Canada, Australia, China,
USA, UK, Germany and Hungary.
A premium conglomerate, the Aditya Birla Group is a dominant player in all of the
sectors in which it operates. Among these are viscose staple fiber, non ferrous metals,