Top Banner

of 22

wcm01

Apr 09, 2018

Download

Documents

Anshuman Singh
Welcome message from author
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
  • 8/7/2019 wcm01

    1/22

    WORKING CAPITAL - Meaning of 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 tocarry out its day- to-day operations. Long terms funds are required to create p

    roduction 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 refer

    s 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.

    CONCEPT OF WORKING CAPITAL

    There are two concepts of working capital:

    1. Gross working capital

    2. Net working capital

    The gross working capital is the capital invested in the total current assets ofthe enterprises current assets are those

    Assets which can convert in to cash within a short period normally one accounting year.

    CONSTITUENTS OF CURRENT ASSETS

    1) Cash in hand and cash at bank

    2) Bills receivables3) Sundry debtors

    4) Short term loans and advances.

    5) Inventories of stock as:

    a. Raw material

    b. Work in process

    c. Stores and spares

    d. Finished goods

  • 8/7/2019 wcm01

    2/22

    6. Temporary investment of surplus funds.

    7. Prepaid expenses

    8. 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 exceedsthe current liabilities are more than the current assets. Current liabilities a

    re 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 LIABILITIES

    1. 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 whereasnet 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 atcorrect time.

    2. Every management is more interested in total current assets with which ithas 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 theenterprise 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 firm s ability to meet to its operating expenses and short-term liabilities.

  • 8/7/2019 wcm01

    3/22

    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 CAPITAL

    Working 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 classif

    ied as: Permanent or fixed working capital.

    Temporary or variable working capital

    PERMANENT OR FIXED WORKING CAPITAL

    Permanent or fixed working capital is minimum amount which is required to ensureeffective utilization of fixed facilities and for maintaining the circulation o

    f 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 isrequired 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 enterpriseis 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.

    And some special al is the amount of working capital which is required to meet the seasonal sets.

    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 promptpayments and makes and maintain the goodwill.

  • 8/7/2019 wcm01

    4/22

    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 Market Conditions: 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 enablesa 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 CAPITAL

    Every business concern should have adequate amount of working capital to run itsbusiness operations. It should have neither redundant or excess working capitalnor inadequate nor shortages of working capital. Both excess as well as short w

    orking capital positions are bad for any business. However, it is the inadequateworking capital which is more dangerous from the point of view of the firm.

    DISADVANTAGES OF REDUNDANT OR EXCESSIVE WORKING CAPITAL

    1. Excessive working capital means ideal funds which earn no profit for thefirm 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 creditpolicy 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 alsofall.

    7. The redundant working capital gives rise to speculative transactions

    DISADVANTAGES OF INADEQUATE WORKING CAPITAL

  • 8/7/2019 wcm01

    5/22

  • 8/7/2019 wcm01

    6/22

    6. WORKING CAPITAL CYCLE: The speed with which the working cycle completes onecycle determines the requirements of working capital. Longer the cycle larger is

    the requirement of working capital.

    DEBTORS

    CASH FINISHED GOODS

    RAW MATERIAL WORK IN PROGRESS

    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 wo

    rking 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, thereis 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 capacitythan 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.

  • 8/7/2019 wcm01

    7/22

    MANAGEMENT OF WORKING CAPITAL

    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 capitalmanagement 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 curr

    ent assets.3. It is concerned with the decision about the composition and level of current liabilities.

    WORKING CAPITAL ANALYSIS

    As 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 workingcapital 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 ANALYSIS

    A ratio is a simple arithmetical expression one number to another. The techniqueof ratio analysis can be employed for measuring short-term liquidity or workingcapital position of a firm. The following ratios can be calculated for these pu

    rposes:

    1. Current ratio.

    2. Quick ratio

    3. Absolute liquid ratio

  • 8/7/2019 wcm01

    8/22

    4. Inventory turnover.

    5. Receivables turnover.

    6. Payable turnover ratio.

    7. Working capital turnover ratio.

    8. Working capital leverage

    9. Ratio of current liabilities to tangible net worth.

    2. FUND FLOW ANALYSIS

    Fund flow analysis is a technical device designated to the study the source fromwhich 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 capital

    b. 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 BUDGET

    A 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 objectiveworking capital budget is to ensure availability of funds as and needed, and toensure 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 LIQUIDITY

    The 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 ofa 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 theconfidence 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.

  • 8/7/2019 wcm01

    9/22

    1. Liquidity ratios.

    2. Current assets movements ratios.

    A) LIQUIDITY RATIOS

    Liquidity refers to the ability of a firm to meet its current obligations as andwhen these become due. The short-term obligations are met by realizing amounts

    from current, floating or circulating assts. The current assets should either beliquid 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 ofa firm, the following ratios can be calculated:

    1. CURRENT RATIO

    2. QUICK RATIO

    3. ABSOLUTE LIQUID RATIO

    1. CURRENT RATIO

    Current 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 LIABILITES

    The two components of this ratio are:

    1) CURRENT ASSETS

    2) CURRENT LIABILITES

    Current 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 hasthe ability to pay its current obligations in time. On the hand a low current r

    atio represents that the liquidity position of the firm is not good and the firmshall not be able to pay its current liabilities in time. A ratio equal or nearto the rule of thumb of 2:1 i.e. current assets double the current liabilities

    is considered to be satisfactory.

    CALCULATION OF CURRENT RATIO

  • 8/7/2019 wcm01

    10/22

    (Rupees in crore)

    e.g.

    Year200620072008

    Current Assets

    81.2983.1213,6.57

    Current Liabilities

    27.4220.5833.48

    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 company s liquidity position is sound. Its current assets are more than its current liabilities.

    2. QUICK RATIO

    Quick ratio is a more rigorous test of liquidity than current ratio. Quick ratiomay be defined as the relationship between quick/liquid assets and current or l

    iquid 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 LIABILITES

    Where Quick Assets are:

    1) Marketable Securities

    2) 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 m

  • 8/7/2019 wcm01

    11/22

    ay be able to meet its short-term obligations. However, a firm having high quickratio may not have a satisfactory liquidity position if it has slow paying debt

    ors. On the other hand, a firm having a low liquidity position if it has fast moving inventories.

    CALCULATION OF QUICK RATIO

    e.g. (Rupees in Crore)

    Year200620072008

    Quick Assets

    44.1447.4361.55

    Current Liabilities27.4220.5833.48

    Quick Ratio

    1.6 : 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. Company s 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 LIABILITES

    Absolute liquid assets = cash & bank balances.

    e.g. (Rupees in Crore)

    Year200620072008

  • 8/7/2019 wcm01

    12/22

    Absolute Liquid Assets4.691.795.06

    Current Liabilities

    27.4220.5833.48

    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 ratios

    Funds are invested in various assets in business to make sales and earn profits.The efficiency with which assets are managed directly affects the volume of sal

    es. 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 indicatethe 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 Ratio

    2. Debtors Turnover Ratio

    3. Creditors Turnover Ratio

    4. Working Capital Turnover Ratio

    The 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 asto meet the requirements of the business. But the level of inventory should nei

    ther 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 inventory

    Inventory turnover ratio measures the speed with which the stock is converted into sales. Usually a high inventory ratio indicates an efficient management of in

  • 8/7/2019 wcm01

    13/22

    ventory because more frequently the stocks are sold ; the lesser amount of moneyis required to finance the inventory. Where as low inventory turnover ratio ind

    icates the inefficient management of inventory. A low inventory turnover impliesover investment in inventories, dull business, poor quality of goods, stock acc

    umulations 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 sold

    110.6103.296.8

    Average Stock

    73.5936.4255.35

    Inventory Turnover Ratio

    1.5 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 company s inventory management technique is less efficient as compare to last year.

    2. Inventory conversion period:

    Inventory conversion period = 365 (net working days)

    inventory turnover ratio

    e.g.

    Year200620072008

    Days

    365365365

    Inventory Turnover Ratio

  • 8/7/2019 wcm01

    14/22

    1.52.81.8

    Inventory Conversion Period

    243 days130 days202 days

    Interpretation :

    Inventory conversion period shows that how many days inventories takes toconvert from raw material to finished goods. In the company inventory conversio

    n 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 salesand 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 Ratio

    b) Average Collection Period

    Debtors Turnover Ratio = Total Sales (Credit)

    Average Debtors

    Debtor s velocity indicates the number of times the debtors are turned over duringa year. Generally higher the value of debtor s turnover ratio the more efficient

    is the management of debtors/sales or more liquid are the debtors. Whereas a lowdebtors turnover ratio indicates poor management of debtors/sales and less liqu

    id 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

    2

    e.g.

    Year200620072008

    Sales

    166.0151.5169.5

  • 8/7/2019 wcm01

    15/22

    Average Debtors17.3318.1922.50

    Debtor Turnover Ratio

    9.6 times8.3 times7.5 times

    Interpretation :

    This ratio indicates the speed with which debtors are being converted orturnover 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 policybecome liberal as compare to previous year.

    4. average collection period :

    Average Collection Period = No. of Working Days

    Debtors Turnover Ratio

    The 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 thebetter 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 Ratio

    Year200620072008

    Days

    365365365

    Debtor Turnover Ratio

    9.68.37.5

    Average Collection Period

    38 days44 days49 days

    Interpretation :

    The average collection period measures the quality of debtors and it h

  • 8/7/2019 wcm01

    16/22

    elps 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 competitor s 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 Capital

    Working Capital Turnover = Sales

    Networking Capital

    e.g.

    Year200620072008

    Sales

    166.0151.5169.5

    Networking Capital

    53.8762.52103.09

    Working Capital Turnover

    3.082.41.64

    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)

  • 8/7/2019 wcm01

    17/22

    Year2005-20062006-20072007-2008

    Inventories

    37.1535.6975.01

    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 Balance

    4.691.795.05

    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 ofthat it disturb the firms manufacturing operations. In 2008, it is increased up

    to approx. 5.1% cash balance. So in 2008, the company has no problem for meetingits requirement as compare to 2007.

    debtors :

    (Rs. in Crores)

    Year2005-20062006-20072007-2008

    Debtors

    17.3319.0525.94

    Interpretation :

  • 8/7/2019 wcm01

    18/22

    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 Assets

    81.29

    83.15136.57

    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 Liability

    27.4220.5833.48

    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)

    Year2005-2006

  • 8/7/2019 wcm01

    19/22

    2006-20072007-2008

    Net Working Capital

    53.8762.53103.09

    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 METHODOLOGY

    The 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/CII. COMMON-SIZE BALANCE SHEET

    III. COMPARTIVE P/L A/C

    IV. COMPARTIVE BALANCE SHEET

    V. TREND ANALYSIS

    VI. RATIO ANALYSIS

    The above parameters are used for critical analysis of financial position. Withthe 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 cas

  • 8/7/2019 wcm01

    20/22

    e 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 resourcesand obligation.

    3. To provide reliable information about change in net resources (recourses lessobligations) 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 donot 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. Theexistence of contingent assets and liabilities also make the statements imprecise. So financial statement are at the most interim reports rather than the finalpicture 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 sheetneither 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 ke

  • 8/7/2019 wcm01

    21/22

    eping in view the economic conditions. the balance sheet loses the significanceof 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 andoperating 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 datain lines of the structure of assets, liabilities etc. and the profit & loss A/cshows the result of operation during a certain period in terms revenue obtainedand 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 ofclassification

    The traditional classification has been on the basis of the financial statementto which the determination of ratios belongs.

    These are:-

    Profit & Loss account ratios

    Balance Sheet ratios

    Composite ratios

    Project Description :

    Title : Working Capital Management of ____________

    Pages : 73

    Category : Project Report for MBA

    We made this project of various companies like Reliance Industries, Grasim Industries, Dabur India Ltd. etc., its cost is Rs. 3499/- only without Synopsis and Rs. 3999/- only with synopsis. If you need this project, mail us at this id : [email protected]

  • 8/7/2019 wcm01

    22/22

    We will send you a hardcopy with hard binding and a softcopy in CD from courier.