Working Capital

INTRODUCTION TO WORKING CAPITAL

1.1 OBJECTIVES OF THE STUDY

To find out the investment needs in current assets to sustain the business operations.

To find out the percentage increase or decrease (trend analysis) of working capital

for the given 5 years.

To strike off a Balance between financial stability and profitability through its

working capital estimation.

To find out the financial position and solvency of the company by calculating the

ratios.

1.2 METHODOLOGY OF THE STUDY

1. Library reference i.e. primary data collection

2. Select an organization

3. Procurement of data

Estimation of working capital

Trend Analysis

Ratios relating to working capital

THEORY OF WORKING CAPITAL

2.1 INTRODUCTION

The management of fixed assets and current assets differ from each in three

main aspects as given below

a) Time factor plays a minor role in managing current assets while it plays a major

role in managing fixed assets. Fixed assets management presents values of expected

future cash inflows and outflows.

b) If a firm maintains a large holding of current assets, in cash, the risk is reduced, but

it also reduces the overall profitability.

c) Though the fixed and current assets levels depend upon sales, only current assets

can be adjusted with sales fluctuations.

The importance of working capital management is reflected in the fact that

financial managers spend a great deal of time in managing current assets and current

liabilities. Arranging short-term financing, negotiating favorable credit terms,

controlling cash movement, managing accounts receivable, and monitoring investments

in inventories consume a great deal of time of financial managers.

2.2 THE CONCEPT OF WORKING CAPITAL

The concept of working capital can be broadly divided into two categories

(i) Gross working capital and (ii) Net working capital.

(i) Gross Working Capital

This concept implies the total of all current assets of a business firm. A current

asset is that asset, which can be converted into cash within an accounting year or an

operating cycle. The current assets include cash and bank balances, debtors, bills

receivables, inventories, prepaid expenses and short- term investments.

(ii) Net Working Capital

This concept of working capital is the difference between current assets and

current liabilities. While current assets have been defined as above, current liabilities

can be explained as those liabilities which are expected to mature for payment within

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

overdraft and other short-term loans.

The net working capital can be positive or negative. If current assets exceed

current liabilities, the difference is positive working capital and when current liabilities

exceed current assets, the difference is negative working capital.

The working capital can also be divided into categories

(i) Fixed working capital and (ii) Fluctuating working capital.

Every business requires some amount of working capital in spite of the level of

operations, throughout the year. This amount represents the fixed amount of working

capital.

2.3 NEED FOR WORKING CAPITAL

The need of gross working capital or current assets cannot be overemphasized.

The object of any business is to earn profits. The main factor affecting the profits is the

magnitude of sales of the business. But the sales cannot be converted into cash

immediately. There is a time lag between the sale of goods and realization of cash.

There is a need of working capital in the form of current assets to fill up this time lag.

Technically, this is called as operating cycle or working capital cycle, which is the heart

of need for working capital. This working capital cycle, can be described in the

following words.

If the company has a certain amount of cash, it will be required for purchasing

the raw material though some raw material may be available on credit basis. Then the

company has to spend some amount for labour and factory overheads to convert the

raw material in work in progress, and ultimately finished goods. These finished goods

when sold on credit basis get converted in the form of sundry debtors. Sundry debtors

are converted in cash only after the expiry of credit period. Thus, there is a cycle in

which originally available cash is converted in the form of cash again but only after

following the stages of raw material, work in progress and sundry debtors. Thus, there

is a time gap for the original cash to get converted in form of cash again. Working

capital needs of company arise to cover the requirement of funds during this time gap,

and the quantum of working capital needs varies as per the length of this time gap.

The working capital cycle is shown below:

WORKING CAPITAL CYCLE

Thus, some amount of funds is blocked in raw materials, work in progress,

finished goods, sundry debtors and day to day cash requirements. However, some part

of these current assets may be financed by the current liabilities also. Example, some

raw material may be available on credit basis, all the expenses need not be paid

immediately, workers are also to be paid periodically etc. But still the amounts required

to be invested in these current assets is always higher than the funds available from

current liabilities. This is the precise reason why the needs for working capital arise.

2.4 THEORY OF WORKING CAPITAL MANAGEMENT

From the financial management point of view, the nature of fixed assets and

current assets differ from each other in the following respects.

1. The fixed assets are required to be retained in the business over a period of time

and they yield the returns over their life, whereas the current assets loose their identity

over a short period of time, say one year.

2. In case of current assets, it is always necessary to strike a proper balance between

the liquidity and profitability principles which is not the case with the fixed assets.

Example, if the size of current assets is large, it is always beneficial from the liquidity

point of view as it ensures the smooth and fluent business operations. Sufficient raw

material is always available to cater to the production needs, sufficient finished goods

are available to cater to any kind of demand of customers, liberal credit period can be

offered to the customers to improve the sales, and sufficient cash is available to pay off

the creditors and so on.

However, if the investment in current assets is more than what is ideally

required, it affects the profitability as it may not be able to yield sufficient rate of return

on investment. On the other hand, if the size of current assets is too small, it always

involves the risk of frequent stock out, inability of the company to pay its dues in time

etc. As such, the investment in current assets should be optimum. Hence, it is necessary

to manage the individual components of current assets (viz. stock, receivables and cash)

in a proper way. Thus, working capital management refers to proper administration of

all aspects of current assets and current liabilities.

Working capital management is concerned with the problems arising out of the

attempts to manage current assets, current liabilities and inter relationship between

them. The intention is not to maximize the investment in working capital nor is it to

minimize the same. The intention is to have optimum investment in working capital. In

other words, it can be said that the aim of working capital management is to have

minimum investment in working capital without affecting the regular and smooth flow

of operations. The level of current assets to be maintained should be sufficient enough

to cover its current liabilities with a reasonable margin of safety.

Moreover, the various sources available for financing working capital should be

properly managed to ensure that they are obtained and utilized in the best possible

manner.

2.5 FACTORS AFFECTING WORKING CAPITAL REQUIREMENTS

The amount of working capital required depends upon a number of factors

which can be stated as below

1. Nature of business

Some businesses are such, due to their very nature, that their requirement of

fixed capital is more than working capital. These businesses sell services and not the

commodities and that too on cash basis. As such, no funds are blocked in piling

inventories and also no funds are blocked in receivables. Example, public utility

services like railways, electricity boards, infrastructure oriented projects, etc. Their

requirement of working capital is less. On the other hand, there are some business like

trading activity, where the requirement of fixed capital is less but more money is

blocked in inventories and debtors. Their requirement of the working capital is

obviously more.

2. Length of Production Cycle

In some business like machine tool industry, the time gap between the

acquisitions of raw material till the end of final production of finished product itself is

quite high. As such more amounts may be blocked either in raw materials, or work in

progress or finished goods or even in debtors. Naturally, their needs of working capital

are higher. On the other hand, if the production cycle is shorter, the requirements of

working capital are also less.

3. Size and Growth of Business

In very small companies the working capital requirements are quite high due to

high overheads, higher buying and selling costs etc. As such, the medium sized

companies positively have an edge over the small companies. But if the business starts

growing after a certain limit, the working capital requirements may be adversely

affected by the increasing size.

4. Business / Trade cycles

If the company is operating in the period of boom, the working capital

requirements may be more as the company may like to buy more raw material, may

increase the production and sales to take the benefits of favorable markets, due to the

increased sales, there may be more and more amount of funds blocked in stock and

debtors etc. Similarly, in case of depression also, the working capital requirements may

be high as the sales in terms of value and quantity may be reducing, there may be

unnecessary piling up of stocks without getting sold, the receivables may not be

recovered in time, etc.

As such, in both these two extreme situations of business/ trade cycles, the

working capital requirement may be high.

5. Terms of Purchase and Sales

Sometimes due to competition or custom, it may be necessary for the company

to extend more and more credit to the customers, as a result of which more and more

amounts is locked up in debtors or bills receivables which increase working capital

requirements. On the other hand, in case of purchases, if credit is offered by the

suppliers of goods and services, a part of working capital requirement may be financed

by them, but if it is necessary to purchase these goods or services on cash basis, the

working capital requirement will be higher.

6. Profitability

The profitability of the business may vary in each and every individual case,

which in its turn may depend upon numerous factors, but high profitability will

positively reduce the strain on working capital requirements of the company, because

the profits to the extent that they are earned in cash may be used to meet the working

capital requirements of the company. However, profitability has to be considered from

one more angles so that it can be considered as one of the ways in which strain on

working capital requirements of the company may be relieved. And these angles are:

(a) Taxation policy how much is required to be paid by the company towards its tax

liability? As the amount of cash profits only after payment of taxes will be available to

the company for meeting its requirements of working capital.

(b) Dividend policy how much of the profits earned by the company are distributed by

way of dividend? As the amount of cash profits to the extent not distributed by way of

dividend only will be available to the company for meeting its requirements of working

capital.

7. Operating Efficiency

If the business is carried on more efficiently, it can operate in profits which may

be reduces by eliminating waste and improved co-ordination etc.

8. Production Policy

Working capital requirements also fluctuate according to the production policy.

Some products have a seasonal demand but in order to eliminate the fluctuations in

working capital, the manufacturer plans the production in a steady flow throughout the

year. This policy evens out the fluctuations in working capital.

9. Market Conditions

Due to competition in the market, the demands for working capital fluctuate. A

business firm has to give liberal credit to customers. It has to maintain a large inventory

of finished goods to serve the customers promptly. In this situation, larger amount of

working capital is required.

On the other hand, when a firm is in seller’s market it can manage with a

smaller amount of working capital because sales can be made on cash basis and there is

no need to maintain large inventory of finished goods because customers can be served

easily.

10. Seasonal Fluctuations

A firm producing products on seasonal demands requires more working capital

during peak seasons while the demand for working capital goes down during slack

season.

11. Dividend policy

A company has to pay dividends in cash as per Company Act, 1956. With

liberal policy for payment of dividends, more working capital will be required, while

the needs for more working capital will be reduced if policy is conservative.

12. Credit policy

The working capital requirements of a firm depend on the credit policy to its

debtors. A liberal credit policy will result in huge funds blocked with debtors which

will enhance the need for working capital. The situation will be further deteriorated, if

the collection procedure is slow. If a liberal credit policy is followed without inquiring

into the creditworthiness of customers, there can be a problem of recovery in future

which will further push up the working capital requirements.

The need for working capital is also affected by the credit policy followed by

the firm’s creditors. If the creditors are ready to supply materials and goods on liberal

credit, working capital requirements are substantially reduced. On the other hand, if

purchases are mainly in cash, working capital needs, goes up. While planning the

working capital, due attention should be given towards credit policies followed by the

firm and its creditors.

2.6 WORKING CAPITAL POLICY

The basic objective of working capital management should be an optimum

investment. There should not be excessive or shortage of working capital. In order to

decide the optimum investment in working capital, there is a need to consider different

policies of working capital.

a) Ratio of current Assets to Sales

The current assets change as a result of changes in the sales. A firm has to

decide about the proportion of current assets to be maintained in relation to sales.

There can be aggressive, moderate or conservative current assets policies.

If an aggressive current assets policy is followed, a firm will maintain a very

low level of current assets in relation to sales. On the other hand, a conservative policy

implies carrying of a very high level of current assets in relation to sales. A moderate

policy is via media between the two extreme policies mentioned above and results into

a moderate proportion of current assets to sales. The result of a conservation current

asset policy is that the risk is reduced. The surplus current assets will ensure that the

firm is able to cope up with fluctuation in sales as well as in production. Besides this,

the higher liquidity in this method will help in eliminating the risk of technical

insolvency. However, high profitability will have to be sacrificed in this method.

An aggressive current assets policy implies that there is a minimum investment

in current assets in relation to sales. This means the firm is taking greater risk. This

method ensures higher profitability but, it exposes the firm to greater risk of technical

insolvency as well as lack of capacity to cope up unanticipated changes in market.

A moderate current asset policy tries to balance risk and profitability by keeping

moderate level of current assets in relation to sales.

The various policies discussed are shown in the following diagram.

b) Ratio of Current Assets to fixed assets

A firm needs fixed assets and current assets to support a level of output. When

output is increases, current assets are increases but not in proportion to the increase in

output. A ratio of current assets to fixed assets indicates the level of current assets.

This ratio is calculated by dividing current assets by fixing assets. Assuming a constant

level of fixed asset, higher current assets to fixed assets ratio indicates a conservative

current assets policy, while a lower ratio indicates an aggressive current assets policy.

Conservative

Moderate

Aggressive

Current Assets

0 Sales

Conservative policy

Average policy

Aggressive policy

Output

Fixed Assets

2.7 SOURCES OF WORKING CAPITAL FINANCING

Ideally, companies finance working capital for business through adequate

capitalization by owners and profits reinvested in the business. Working capital

financing of various types are often needed, however, especially in the day-to-day

operations of growing businesses.

Working Capital Finance may be classified in:

Spontaneous Finance:

Finance which naturally arises in the course of the business is called as

“Spontaneous Financing”. Trade Creditors, credit from employees, credit from

supplier of service etc. are examples of spontaneous finance.

Negotiation Finance:

Financing which has to be negotiated with lenders, say commercial banks,

finance institutions, general public is called as “Negotiated Finance”. This kind of

financing may be short-term in nature or long term.

Between spontaneous and negotiated sources of finance, the latter is more

expensive and inconvenient to rise. Spontaneous sources of finance reduce the amount

of negotiated financing.

Sources of Working Capital

Spontaneous

Trade CreditSundary CreditorsBills PayableNote Payable

Negotiated Sources

Internal Tax and Dividends provision

External Bank overdraft Cash credit

Short- term sources

Long term Sources.

Internal Retained profits Provision for depreciation

External Share capital Long-term loans Debentures

CRYSTAL SOLUTIONS PRIVATE LIMITED

3.1 COMPANY PROFILE

Name Crystal Solutions Private Limited

Firm Type Private Ltd Company

Industry Type Service Industry

Managing Director Mr. Vasant Bhanushali

Stake Holders Mr. Vasant Bhanushali and Mr. Kiran Shiveskhar

Auditor Jignesh R. Mehta and Associates,

Borivali East, Mumbai

Corporate Office 716/717,Reena Complex Vidyavihar(W)

Mumbai - 400 086.

India

Other branches U.S. Office 244, Fifth Avenue,

Suite 2795, 2nd floor,

New York, NY 10001

Singapore

Nature of Business Providing online security solutions

Slogan “for powerful network solution”

Their Customers Tata Communications Ltd.

Rediff.com

Times of India

Garware

Crompton & Greaves

Web-site www.crystalonnet.com/Solutions.htm

Customer Care 91-022-67179700

Fax No 91-022-67179702

E-mail www. [email protected]

3.2 ABOUT THE COMPANY

Crystal Solutions Pvt. Ltd., established since 1994 has been a key player in the

anti-virus and security market. Crystal has a composite team structure which includes

commercial as well as technical personnel to facilitate easy accountability and access

for all our clients. Dedicated Customer Support Center enables to streamline support

schedules, avoiding failed commitments. Crystal Solutions Pvt. Ltd is also a Leading

International Recruitment Service Provider. The entire focus being delivery of timely

and quality support to all their direct and indirect customers.

Crystal has always ensured that the companies is with the trend and advances in

the technology and transfer the same to all employees who interface with the customer.

In their endeavor to provide comprehensive solutions to their customers and

their channel partners all over India, Crystal has established tie-ups with many

international software vendors to deliver their solution in India Crystal plans to have

strategic tie-up with many other software vendors and some are almost at

materialization.

3.3 THEIR SERVICES AND PRODUCTS

Anti-Virus Solutions

They have 9+ years of experience in Anti-virus industry and are in a position to

suggest the right solution rather than sell a product. They have the skills to implement

and support McAfee, Symantec, Trend Micro.

Firewalls and Intrusion Detection

They offer affordable security solution on corporate firewalls and IDS. They

provide Checkpoint, Symantec Firewall, Stonegate, Netscreen and comprehensive

policy setting and configuration.

Linux Solution

They have acquired excellent technical competence in Linux and can provide

comprehensive solutions on Linux covering

(1) Mail server with global address book

(2) Proxy server, with site control.

(3) Integrated anti-virus solution.

Enterprise Back-Up Solutions

They can help you with your Data Availability and Back-Up Management and

provide Veritas, Computer Associates Arcserver, Doubletake.

Messaging Solutions

They have Strong, Cost Effective mailing solutions from Mdaemon / VPO3

/602 Lan Suite. Integrated Anti-Virus to filter out I-worms at the mail gateway They

support Exchange, Lotus Notes and any other mail server

Web Access Solutions

They supply world renowned proxy solutions like Winproxy Wingate with

excellent Management reporting features. They support implementation of FTP

softwares like FTP SERV-U , FTP Client.

3.3 PRODUCTS AND SERVICES OFFERED

mdaemon

Windows-based email server software, contains full mail server functionality

and control with a strong emphasis on security to protect your email communication

needs. 

VPOP3

VPOP3 Overview VPOP3 is a fully-featured Windows Email Server. It is

designed to be simple to configure and use, but flexible enough to fulfil most users'

requirements.

  602LAN Suite

The most affordable network solution is now here. Get a secure mail server with

anti-virus & anti-spam, built-in firewall with NAT and web content filter proxy for

controlled Internet sharing. Access your e-mail anywhere using the Web Mail client.

    WinGate

WinGate is designed to meet the control, security and email needs of today’s

Internet-connected businesses. WinGate Proxy Server takes the angst out of getting

your network connected to the Internet, and making sure it is protected when you get

there.

  Winproxy

Blue Coat is the leading developer of secure Internet sharing solutions for small

to mid-sized networks and we do something very unique in our industry. We eliminate

the need for you to have a network expert configure your Internet sharing solution.  

  McAfee

McAfee System Protection Solutions, securing desktops and servers, and

McAfee Network Protection Solutions, ensuring the protection and performance of the

corporate network, McAfee offers computer security to large enterprises, governments,

small and medium businesses, and consumers.

Symantec

Symantec is the world leader in providing solutions to help individuals and

enterprises assure the security, availability, and integrity of their information.

Headquartered in Cupertino, Calif., Symantec has operations in more than 40 countries.

AVG

AVG Anti-Virus as a product line supports all major operating systems and

platforms. More than 20 million users around the world use Grisoft AVG products to

protect their computers.

Veritas

VERITAS software products lead the way with solutions to help you improve

availability, performance, and automation. Our products are designed for an open,

heterogeneous product environment -- no hardware agenda here -- which gives you

maximum flexibility to evolve your IT environment over time.

Double-Take

Double-Take is certified for Windows 2003 Standard, Enterprise and Datacenter

Editions! Double- Take is your downtime-prevention (and career) insurance policy. It's

the World's Market leader in Disaster Recovery. You get real-time data protection to

reduce data loss and downtime, and enhance the performance of your existing backup

apps.

Outpost Firewall

Being online is fraught with dangers, Internet worms, spy ware agents; Trojan

horses, hijackers and more can wreak havoc, causing anything from slow performance

to system crashes to full-blown identity theft. And to provide you with the kind of

protection you need in these days of cyber thieves and online extortionists, your

firewall must be able to monitor all inbound and outbound traffic and protect you from

any unauthorized intrusion by rendering your PC invisible to anything that you haven’t

authorized to see it.

Zone Alarm

ZoneAlarm Pro provides you with easy-to-use protection against spyware,

hackers, and identity thieves.

CounterSpy

CounterSpy detects, deletes and protects you against spy ware. You arrived at

this page because you want to get rid of malicious spy ware and adware that invades

your PC without your knowledge or permission. Why choose CounterSpy. According

to PC World it has the best spy ware database in the industry. That means it removes

the most spy ware.

ANALYSIS OF FINANCIAL STATEMENTS OF THE COMPANY

Particulars 2007 2006 2005 2004 2003

CURRENT ASSETS

Inventories 385442 35125 385442 347442 578377

Sundry Debtors 4078947.12 2522820.69 3618713.14 2614018.47 2895696.90

Advances/Loan/ Deposits

1891944.13 2098467.56 1405779.56 946327.12 631445.59

Cash & Bank Balances

(-)754559.73 450042.53 618571.29 1426545.88 1083021.39

Total 5601773.52 5106455.78 6028505.99 5334333.47 5188540.88

CURRENT LIABILITIES

Current liabilities & Provision

3526421.06 2416115.26 2580751.99 2515224.52 2808029.95

Total 3526421.06 2416115.26 2580751.99 2515224.52 2808029.95

WORKING CAPITAL

= Current Asset- Current Liabilities

2075352.46 2690340.52 3447754.00 2819108.95 2380510.93

4.1 Assessment of Working Capital for all the 5 years i.e. from 2003-2007 Summary:

From the above figures, it is observed that from 2003-2005 the working capital

was steadily increasing while 2006-2007, the working capital has significantly

decreased. This can be possible due to decrease in current assets and increase in current

liabilities.

The basic objective of working capital management is to make optimum

investments. Hence, the company should improve its working capital requirement to

utilize them effectively and efficiently in investments.

4.2 Calculations of Ratios from 2003-2007

No. Ratios 2007 2006 2005 2004 2003

1.Current Ratio = Current AssetsCurrent Liabilities

1.58 2.11 2.33 2.12 1.84

Significance:

The ideal ratio considered is 2:1. This ratio is also named as, “Working Capital

Ratio” as it represents the working capital being the excess of the current assets over the

current liabilities. This ratio indicates the solvency of their business i.e. ability to meet

the liabilities of the business as and when they fall due. The current assets are the source

from which the current liabilities have to be met. It is also the measure of the margin of

safety that management maintains in order to allow for the inevitable unevenness in the

flow of funds through the current assets and liability accounts.

Though 2:1 ratio is considered desirable, it is not must – it depends upon the

nature of the industry. What is more important is not the size of current ratio but the

distribution and characteristics of current assets and current liabilities and their relation to

the prospective sales volume.

Findings and Suggestions:

The current ratio has always been almost 2:1 or more than 2:1. Hence the company

should either decrease its current liabilities or increase its current assets, so as to maintain

the ideal ratio 2:1. This signifies the liquidity or solvency of the firm.

This also enables them to meet their short term obligations as and when they fall

due.

No. Ratios 2007 2006 2005 2004 2003

2.

Liquid Ratio = Current Asset – (Stock and prepared expenses) Current Liabilities

1.47 2.09 2.18 1.98 1.64

Significance:

The quick ratio indicates the relation of ‘quick assets’ with ‘quick liabilities’. Quick

or liquid assets include all current assets, except stock and prepaid expenses where as liquid

liabilities include all current liabilities except overdraft and accrued expenses.

If this ratio is 1:1 it is considered that all claims will be met when they arise. It is a

measure of the extent to which liquid resources are immediately available to meet current

obligations. In so far as it eliminates inventory as a part of current ratio, the ratio is a more

rigorous test of liquidity than the current ratio and when used in conjunction with it, gives a

better picture of the firm’s ability to meet its short term debts out of short term assets.

This ratio does not take into account two important factors i.e. certain portions of

stock would be sold over to meet current liabilities and all creditors would not be required

to be paid at the same time.

Findings and Suggestions:

According to the above figures, the liquid ratio has been more than the ideal ratio

i.e. 1:1. This implies that the current assets of the firm can be readily converted into cash

and helps to meet the current liabilities. In case, this ratio is less than 1:1, it shows a very

weak short-term financial position and in case, it is more than 1:1, it shows a better short-

term financial position.

Therefore, the company should try and maintain this trend.

No. Ratios 2007 2006 2005 2004 2003

3.Working Capital Turnover Ratio = Sales Working Capital

12.50 6.90 2.60 3.00 2.20

Significance:

The working capital turnover ratio measures the efficiency with which the working

capital is being used by a firm. A high ratio indicates efficient utilization of working

capital and a low ratio indicates otherwise. But a very high working capital turnover ratio

may also mean lack of sufficient working capital which is not a good situation.

Findings and Suggestions:

This ratio indicates the number of times the utilization of working capital in the

process of doing business. The higher is the ratio, the lower is the investment in working

capital and the greater are the profits. However, a very high turnover indicates a sign of

over-trading and puts the firm in financial difficulties. A low working capital turnover

ratio indicates that the working capital has not been used efficiently.

According to the above figures, the working capital turnover ratio in 2003 is 2.20:1

which has been marginally increasing. In 2006 and 2007, the working capital turnover

ratio being 6.90:1 and 12.50:1 respectively, implies that the working capital has been

efficiently utilized and the company is also able to generate more net sales with smaller

amount of working capital

Thus, the present status is a favorable situation for the company.

No. Ratios 2007 2006 2005 2004 2003

4.Current Asset Turnover Ratio = Sales Current Assets

4.63 3.63 1.49 1.58 1.01

Significance:

Current Assets Turnover ratio shows the productivity of the company's current assets.

The assets turnover ratio is a key to understand financial statements. The ratio calculation

reduces time and effort in calculating decision making ratios. They reduce risk for lenders

and investors and enable owners, managers and consultants to increase productivity and

business profits. These ratios are bargain priced to provide a huge return on investment.

Findings and Suggestions:

There is no norm for this ratio. On the basis of the nature of the business, there may

be different ratios for different concerns. However this ratio indicates the extent to which

the proprietor’s funds are invested in current assets.

According to the above figures, this ratio has been increasing from 2003 to 2007. In

2003, it was 1.01:1 and in 2007 it is 4.63:1. A high ratio should be maintained in order to

increase the productivity.

Currently the current assets turnover ratio is at its best in the past five years and the

company, being a service firm, should try to increase it or maintain the same.

No. Ratios 2007 2006 2005 2004 2003

5.

Inventory : Working Capital Ratio = Closing StockWorking Capital

0.18 0.013 0.11 0.12 0.24

Significance:

The ratio is an index of the position of over stocking. It shows what part of working

capital is represented by closing stocks. This ratio tells how much of a company's funds

are tied up in inventory. It is preferable to run the business with as little inventory as

possible on hand, while not affecting potential sales opportunities. Keeping track of

inventory levels is crucial to determining the financial health of the business. If this

number is high compared to the average for your industry, it could mean the business is

carrying too much inventory.

Inventory to working capital ratio is an important indicator of a company’s

operation efficiency. A low value 1 or less of inventory to working capital ratio means that

a company has high liquidity of current asset. While it may also mean insufficient

inventories. A high value of inventory to working capital ratio means that a company is

carrying too much inventory in stock. It is not favorable for management because

excessive inventories can place a heavy burden on the cash resources of a company. A key

issue for a company to improve its operation efficiency is to identify the optimum

inventory levels and thus minimize the cost tied up in inventories.

Findings and Suggestions:

According to the above figures from 2003-2007, this ratio has always been less than

1. Hence, this shows that not much of the company’s funds are held up in inventories. One

reason can be that this company is a service firm.

No. Ratios 2007 2006 2005 2004 2003

6.

Current Assets : Proprietary Funds Current Assets * 100*Proprietary Funds

230.22% 256.89% 343.22% 326.92% 417.70%

*Proprietory funds include equity share capital and reserves and surplus

Significance:

The ratio shows the percentage of proprietors funds invested in current assets. In

case of too small investment of proprietor’s funds in current assets, there may be shortage

of working capital. The ratio must be studied in relation to fixed assets to proprietory

funds ratio. This ratio establishes the relationship between current assets and shareholder's

funds. The purpose of this ratio is to calculate the percentage of shareholders funds

invested in current assets

Findings and Suggestions:

The ideal percent used should be 100%. But, from the above figures, it is observed

that the percentage for 2003 has been 417% while in 2007 it is 230%. Hence there is a

decrease in percentage over the 5 years. The company should also try to decrease it further

to 100%.

4.3 Trend analysis

Particulars 2007 2006 2005 2004 2003

WORKING CAPITAL

= Current Asset- Current Liabilities

2075352.46 2690340.52 3447754.00 2819108.95 2380510.93

% increase in working capital

-22.85% -21.96% 22.29% 18.42%

% increase in working capital = Final value – Initial value *100

Initial value

Final value is the value of the current year

Initial value is the value of the previous year

From the above graph, it can be seen that, previously there was an increase in

the working capital i.e. from 2003 to 2005. Then in comparison to 2005, the working

capital decreased and as compared to 2006the working capital decreased by 22.85%.

The present status of the company is although good but it shows that over the 5 years

the working capital has first increased and then decreased. Thus, the company should

improve its working capital.

CONCLUSION

There are many different equity and debt options available to small business

owners, and choosing the appropriate one(s) is essential to ensuring a healthy business.

If the business has a good capital structure and strong working capital management,

then a higher resale value is possible, and it may then prove easier to attract buyers.

Current Assets are essential in sustaining the operations of a business. Working

Capital Management deals with how current assets are managed and financed. The

objective of working capital management is to maximize profitability without

jeopardizing liquidity.