Chapter No. Particular Page No. Title Page Declaration Certificate From Company Certificate From Guide Acknowledgement I II III IV V 1 WORKING CAPITAL MANAGEMENT I. Introduction II. Objectives Of The Study III. Need And Importance Of Working Capital IV. Gross W.C And Net W.C V. Types Of Working Capital VI. Determination Of Working Capital VII. Scope & Limitations 2 RESEARCH METHODOLOGY I. Introduction II. Type of Research Methodology 3 INTRODUCTION OF COMPANY I. Company Overview II. Industrial Overview III. Literature Overview
The need for working capital gross or current assets cannot be over emphasized. As already observed, the objective of financial decision making is to maximize the shareholders wealth. To achieve this, it is necessary to generate sufficient profits can be earned will naturally depend upon the magnitude of the sales among other things but sales can not convert into cash.
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Chapter No.
Particular Page No.
Title PageDeclaration Certificate From CompanyCertificate From Guide Acknowledgement
IIIIIIIVV
1 WORKING CAPITAL MANAGEMENT
I. IntroductionII. Objectives Of The Study
III. Need And Importance Of Working CapitalIV. Gross W.C And Net W.CV. Types Of Working Capital
VI. Determination Of Working CapitalVII. Scope & Limitations
2 RESEARCH METHODOLOGYI. Introduction
II. Type of Research Methodology
3 INTRODUCTION OF COMPANYI. Company Overview
II. Industrial OverviewIII. Literature Overview
4 DATA ANALYSIS1 Working Capital Size And Analysis 1.1.1 Working Capital Level1.1.2 Working Capital Trend Analysis1.1.3 Current Asset Analysis1.1.4 Current Liabilities Analysis1.1.5 Change In Working Capital1.1.6 Operating Cycle1.1.7 Working Capital Leverage
2 Working Capital Ratio Analysis 2.1.1 Introduction 2.1.2 Role Of Ratio Analysis2.1.3 Limitation Of Ratio Analysis2.1.4 Classification Of Ratio2.1.5 Efficiency Of Ratio2.1.6 Liquidity Of Ratio
3 Working Capital Component 3.1.1 Receivable Management3.1.2 Inventory Management3.1.3 Cash Management
4 Working Capital Finance & Estimation 4.1.1 Introduction4.1.2 Source Of Working Capital Finance4.1.3 Working Capital Loan & Interest4.1.4 Estimation Of Working Capital
Working capital management is concerned with the problems arise in attempting to manage the current assets, the current liabilities and the inter relationship that exist between them. The term current assets refers to those assets which in ordinary course of business can be, or, will be, turned in to cash within one year without undergoing a diminution in value and without disrupting the operation of the firm. The major current assets are cash, marketable securities, account receivable and inventory. Current liabilities ware those liabilities which intended at there inception to be paid in ordinary course of business, within a year, out of the current assets or earnings of the concern.
The basic current liabilities are account payable, bill payable, bank over-draft, and outstanding expenses. The goal of working capital management is to manage the firm’s current assets and current liabilities in such way that the satisfactory level of working capital is mentioned. The current should be large enough to cover its current liabilities in order to ensure a reasonable margin of the safety.
Definition :
According to Guttmann & Dougall-
“Excess of current assets over current liabilities”.
According to Park & Gladson-
“The excess of current assets of a business (i.e. cash, accounts receivables, inventories) over current items owned to employees and others (such as salaries & wages payable, accounts payable, taxes owned to government)”.
1.2) Need of working capital management
The need for working capital gross or current assets cannot be over emphasized. As already observed, the objective of financial decision making is to maximize the shareholders wealth. To achieve this, it is necessary to generate sufficient profits can be earned will naturally depend upon the magnitude of the sales among other things but sales can not convert into cash. There is a need for working capital in the form of current assets to deal with the problem arising out of lack of immediate realization of cash against goods sold. Therefore sufficient working capital is necessary to sustain sales activity.Technically this is refers to operating or cash cycle. If the company has certain amount of cash, it will be required for purchasing the raw material may be available on credit basis. Then the company has to spend some amount for labour and factory overhead to convert the raw material in work in progress, and ultimately finished goods. These finished goods convert in to sales on credit basis in the form of sundry debtors. Sundry debtors are converting into cash after expiry of credit period. Thus some amount of cash is blocked in raw materials, WIP, finished goods, and sundry debtors and day to day cash requirements. However some part of current assets may be financed by the current liabilities also. The amount required to be invested in this current assets is always higher than the funds available from current liabilities. This is the precise reason why the needs for working capital arise.
1.3) Gross working capital and Net working capital
There are two concepts of working capital management :
1) Gross working capital
Gross working capital refers to the firm’s investment I current assets. Current assets are the assets which can be convert in to cash within year includes cash, short term securities, debtors, bills receivable and inventory.
2) Net working capital
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 an accounting year and include creditors, bills payable and outstanding expenses. Net working capital can be positive or negative. Efficient working capital management requires that firms should operate with some amount of net working capital, the exact amount varying from firm to firm and depending, among other things; on the nature of industries. Net working capital is necessary because the cash outflows and inflows do not coincide.
The cash outflows resulting from payment of current liabilities are relatively predictable. The cash inflow are however difficult to predict. The more predictable the cash inflows are, the less net working capital will be required.
The concept of working capital was, first evolved by Karl Marx. Marx used the term ‘variable capital’ means outlays for payrolls advanced to workers before the completion of work. He compared this with ‘constant capital’ which according to
him is nothing but ‘dead labour’. This ‘variable capital’ is nothing
wage fund which remains blocked in terms of financial management, in work-in-process along with other operating expenses until it is released through sale of finished goods. Although Marx did not mentioned that workers also gave credit to the firm by accepting periodical payment of wages which funded a portioned of W.I.P, the concept of working capital, as we understand today was embedded in his ‘variable capital’.
1.4) Type of working capital :
The operating cycle creates the need for current assets (working capital). However the need does not come to an end after the cycle is completed to explain this continuing need of current assets a destination should be drawn between permanent and temporary working capital.
1) Permanent working capital
The need for current assets arises, as already observed, because of the cash cycle. To carry on business certain minimum level of working capital is necessary on continues and uninterrupted basis. For all practical purpose, this requirement will have to be met permanent as with other fixed assets. This requirement refers to as permanent or fixed working capital.
2) Temporary working capital
Any amount over and above the permanent level of working capital is temporary, fluctuating or variable, working capital. This portion of the required working capital is needed to meet fluctuation in demand consequent upon changes in production and sales as result of seasonal changes.
Graph shows that the permanent level is fairly castanet; while temporary working capital is fluctuating in the case of an expanding firm the permanent working capital line may not be horizontal.
This may be because of changes in demand for permanent current assets might be increasing to support a rising level of activity.
1.5) Determinants of working capital
The amount of working capital is depends upon a following factors :
1) Nature of business
Some businesses are such, due to their very nature, that their requirement of fixed capital is more rather than working capital. These businesses sell services and not the commodities and that too on cash basis. As such, no founds are blocked in piling inventories and also no funds are blocked in receivables. E.g. public utility services like railways, infrastructure oriented project etc. there requirement of working capital is less. On the other hand, there are some businesses like trading activity, where requirement of fixed capital is less but more money is blocked in inventories and debtors.
2) Length of production cycle
In some business like machine tools industry, the time gap between the acquisition of raw material till the end of final production of finished products itself is quite high. As such amount may be blocked either in raw material or work in progress or
finished goods or even in debtors. Naturally there need of working capital is high.
3) Size and growth of business
In very small company the working capital requirement is quit high due to high overhead, higher buying and selling cost etc. as such medium size business positively has edge over the small companies. But if the business start growing after certain limit, the working capital requirements may adversely affect by the increasing size.
4) Business/ Trade cycle
If the company is the operating in the time of boom, the working capital requirement may be more as the company may like to buy more raw material, may increase the production and sales to take the benefit of favorable market, due to
increase in the sales, there may more and more amount of funds blocked in stock and debtors etc. similarly in the case of depressions also, working capital may be high as the sales terms of value and quantity may be reducing, there may be unnecessary piling up of stack without getting sold, the receivable may not be recovered in time etc.
5) Terms of purchase and sales
Some time due to competition or custom, it may be necessary for the company to extend more and more credit to customers, as result which more and more amount is locked up in debtors or bills receivables which increase the working capital requirement. On the other hand, in the case of purchase, if the credit is offered by suppliers of goods and services, a part of working capital requirement may be financed by them, but it is necessary to purchase on cash basis, the working capital requirement will be higher.
6) Profitability
The profitability of the business may be vary in each and every individual case, which is in turn its depend on numerous factors, but high profitability will positively reduce the strain on working capital requirement of the company, because the profits to the extend that they earned in cash may be used to meet the working capital requirement of the company.
7) Operating efficiency
If the business is carried on more efficiently, it can operate in profits which may reduce the strain on working capital; it may ensure proper utilization of existing resources by eliminating the waste and improved coordination etc.
RATIO ANALYSIS
Introduction of Ratio Analysis
Alexander Wall made the presentation of an elaborate system of ratio analysis in
1919. He criticized the bankers for their lopsided development owing to their
decisions regarding the grant of credit on current ratio alone. Alexander Wall, one
of the foremost proponents of ratio analysis, pointed out that in order to get a
complete picture, it is necessary to consider the other relationship in the financial
statement than current ratio. Since then, more & more types of ratios have been
developed and are used for analysis and interpretation point of view.
Ratio may be defined as “a number expressed in terms of another number.” It
shows relationship of one figure with another figure. It is found by dividing
one number by the other number. It may be expressed as a percentage or in
terms of “times” or proportion or as quotient.
According to Robert N. Anthony “A ratio is simply one number expressed in
term of another”.
Ratio Analysis, therefore, means the process of computing, determining and
presenting the relationship of related items and group of items of the financial
statement.
“The relationship between two accounting figures, expressed mathematically, is
known as financial ratio. Ratio analysis is the process of identifying the financial
strengths and weakness of an enterprise by properly establishing relationships
between the items of the balance sheet and profit and loss account”.
“The essence of financial soundness of a company lies in balancing its goals,
commercial strategy, product market choices and resultant needs. The company
should have financial capability and flexibility to pursue its commercial strategy.
Ratio analysis is a very useful analytical technique to raise pertinent question on a
number of managerial issues. It provides bases or clues to investigate such issues
in detail”.
Ratio analysis is the one of the powerful tools of the financial analysis. “A ratio
can be defined as the indicated quotient of mathematical expression” and as “the
relationship between two or more things”.
Accounting ratios can be expressed in various ways such as: -
i. A pure ratio, say ratio of current assets to current liabilities is 2:1 or,
ii. A ratio, say current assets are two times of current liabilities or
iii. A percentage, say current assets are 200% of current liabilities.
Each method of expression has a distinct advantage over the other. The analyst will
select that method which will best suit his convenience and purpose.
Standard (or Basis) of Comparison of Ratio Analysis: -
The ratio analysis involves comparison for a senseful interpretation of financial
statement. A single ratio in itself does not indicate favourable or unfavourable
condition. It should be compared with some standard. According to Anthony, R.N.
and Reece, J.S. (Management Accounting Principle PP. 260-263), standard of
comparison consist of –
1. Ratio calculated from past financial statement of the same enterprise.
2. Ratio developed using the projected or Performa, financial statements of
the same enterprise.
3. Ratio of some selected enterprise, especially the most progressive and
successesful, at the same point of time, and
4. Ratio of the industry to which the enterprise belongs.
The easiest way to evaluate the performance of a company is to compare present
or current ratio with the past ratios. If financial ratios over a time are compared, it
is known as the time series or trend analysis. The trend analysis provides an
indication of the direction of change and reflects the performance of an enterprise.
Importance (or Advantage) of Ratio Analysis:-
Ratio analysis is the process of determining and presenting the relationship of
items and group of items in the financial statements. It is an important technique of
financial stability and health of a concern can be judged. The following are the
main points of importance or advantages of ratio analysis:
1. Useful in financial position analysis: - Accounting ratios reveal the
financial position of the concern. This helps the banks, insurance companies and
other financial institutions in leading and making investment decisions.
2. Useful in simplifying accounting figure: - Accounting ratios simplify,
summaries and systematize the accounting figures in order to make them more
understandable and in lucid form. They highlight the inter-relationship, which
exists between various segments of the business as expressed by accounting
statements.
3. Useful in assessing the operational efficiency: - Accounting ratios help
to have an idea of a concern. The efficiency of the enterprise becomes evident
when analysis is based on accounting ratios. They diagnose the financial health by
evaluating liquidity, solvency, profitability etc. This helps the management to
assess financial requirements and the capabilities of various business units.
4. Useful in forecasting purpose: - If accounting ratios are calculated for a
number of years, than a trend is established. This trend helps in setting up future
plans and forecasting. For example, expenses as a percentage of sales can be easily
forecasted on the basis of sales and expenses of the past years.
5. Useful in locating the weak spots of the business: - Accounting ratios
are of a great assistance in locating the weak spots in the business even through the
overall performance may be efficient. Weakness in financial structure due to
incorrect policies in the past or present are revealed through accounting ratio.
6. Useful in comparison of performance: - Through accounting ratios
comparison can be made between one department of an enterprise with another of
the same enterprise in order to evaluate the performance of various departments in
the enterprise. Managers are naturally interested in such comparison in order to
know the proper and smooth functioning of such departments. Ratios also help
them to make any change in the organization structure.
Limitation of Accounting Ratios(or Ratio Analysis) :-
Ratio analysis is very important in revealing the financial position and
soundness of the business or enterprise. Ratio Analysis is very fashionable
these days and useful but it has some limitations also, which restrict its use.
These limitations should be kept in mind while making use of ratio analysis
for interpreting the financial statements. The following are the main
limitations of accounting ratios.
1. False results: - Ratios are based upon the financial statement. In case,
financial statements are incorrect or the data upon which ratios are based
is incorrect, ratios calculated will also be false and defective. The
accounting system itself suffers from many inherent weaknesses, so the
ratios based upon it cannot be said to be always reliable.
For instance, if inventory value is inflated, not only will one have an
exaggerated view of profitability of the concern, but also of it financial position.
Also the ratios worked out on its basis are to be relied upon.
2. Variation in accounting policies: - Financial results of two enterprises
are comparable with the help of accounting ratios only if they follow the same
accounting policy or bases, comparison will become difficult if they two concerns
follow different policies for providing depreciation, valuation of stock etc.
Similarly, if the enterprises are following different standards and methods, an
analysis by reference to the ratio would be misleading. The ratio of the one firm
cannot always be compared with the performance of other firm, if they do not
adopt uniform accounting policies.
3. Price level changes affect ratios: - The third major limitation of the ratio
analysis, as a tool of financial analysis is associated with price level change. This,
in fact, is a weakness of the Traditional Financial Statements, which are based on
Historical cost. As a result, ratio analysis will not yield strictly comparable and,
therefore, dependable results.
To illustrate, there are two firms, which have identical rates of return on
Investment, say, 15%. But one of these had acquired its Fixed Assets when prices
were relatively low while the other one had purchased them when prices were
high. The result will be that the book value of fixed assets of the former firm would
be lower, while that of the later will be high. From the point of profitability the
Return on Investment of the firm with lower book value are over-stated.
4. Absence of standard universally accepted terminology: - Different
meanings are given to particular term, such as some firms take profit before
interest and after tax, other may take profit before interest and tax. Bank overdraft
is taken as current liability but some firms may take it is as non-current. The ratios
can be comparable only when both the firms adopt uniform terminology.
5. Ignoring qualitative factors: - Ratio analysis is the quantitative
measurement of the performance of the business. It ignores the qualitative aspect
of the firm, how so ever important it may be. It shows that ratio is only one-sided
approach to measure the efficiency of the business.
6. No single standard ratio: - There in not a single standard ratio, which
can indicate the true performance of the business at all time, and in all
circumstances. Every firm has to work in different situations and circumstances, so
a particular ratio cannot be supposed to be standard for every one. Strikes,
lockouts, floods, wars, etc. materially affect the performance, so it cannot be
matched with the circumstances in normal days.
7. Misleading results in the absence of absolute data: - In the absence of
actual data, the size of the business cannot be known. If Gross Profit Ratio of two
firms is 25% it may be just possible that the gross profit of one is 2,500 and sales
Rs. 10,000, whereas the gross profit and sales of the other firm is Rs. 5,00,000 and
sales 20,00,000. Profitability of the two firms is the same but the magnitude of
their business is quite different.
8. Window dressing: -Many companies, in order to depict rosy picture of
their business indulge in manipulation. They conceal the material facts and exhibit
false position. It makes the Financial Statements and Ratio Analysis based upon
these statements defective. The process of manipulation includes under statement
of Current Liability, over statement of Current Assets, recording the transaction in
the next financial year, showing the purchases of raw material as purchases of
assets etc. Window dress restricts the utility of ratio analysis.
Even when the ratios are worked out correctly, it should be remembered that they
can at best be used like a Doctor uses symptoms – indication that something is
wrong somewhere. Just as the Doctor will try to get to the real reason, in the same
manner the analyst should try to identify the real factor leading to the present state
of affairs. Suppose the ratio of Gross Profit to Sale is low. The reason may be poor
sales, bad purchasing, defective pricing policy, wastage and losses etc. Ratio thus
point out the area that needs investigation –this is only a tool in the hand of the
person trying to get at the truth.
Types of Ratios and their uses: -
Ratios may be classified in a number of ways keeping in view the particular
purpose. Ratios indicating profitability are calculated on the basis of the Profit and
Loss Account, those indicating financial position are computed on the basis of the
Balance Sheet and those which show operating efficiency or productivity or
effective use of resources are calculated on the basis of figures in the Profit and
Loss Account and the profitability and financial position of the business/company.
To achieve this purpose effectively, ratios may be classified into the following four
important categories:
A. Liquidity Ratio,
B. Leverage Ratio / Solvency Ratio,
C. Activity Ratio / Turnover Ratio,
D. Profitability Ratio.
Liquidity Ratios
To study the liquidity position of the concern in order to highlight the relative
strength of the concern in meeting their current obligation liquidity ratios are
calculated. These ratios are used to measure the enterprise’s ability to meet
short-term obligations. These ratios compare short-term obligation to short-
term (or current) resources available to meet these obligations. From these
ratios, much insight can be obtained about the present cash solvency of the
enterprise and the enterprises ability to remain solvent in the event of
adversity. A proper balance between the two contradictory requirements, i.e.
Liquidity and Profitability is required for efficient financial management. The
important liquidity ratios are: -
1. Current Ratio: - This is the most widely used ratio. It is the ratio of Current
Assets to Current Liabilities. It shows an enterprise ability to cover its current
liabilities with its current assets. It is expressed as follows: -
Current Assets
Current Ratio =
Current Liabilities
Generally, Current Ratio of 2:1 is considered ideal for any concern i.e. current
assets should be twice the amount of current liabilities. If the current assets are two
times the current liabilities, there will be no adverse effect on business operations
when current liabilities are paid off. If the ratio is less than 2 difficulties may be
experienced in the payment of current liabilities and day-to-day operations of the
business may suffer. If the ratio is higher than 2, it is very comfortable for the
creditors but, for the concern, it indicates accumulation of idle funds and a lack of
enthusiasm for work. However this standard of 2:1 is only quantitative and may
differ from industry to industry.
2. Liquid or Acid Test or Quick Ratio: - This is the Ratio of Liquid Assets
to Liquid Liabilities. It shows an enterprises ability to meet current liabilities with
its most liquid (quick assets). It is expressed as follows: -
Quick Assets
Liquid Ratio =
Current Liabilities
(Quick Assets = Current Assets – Inventory or Stock)
The quick ratio of 1:1 ratio is considered ideal ratio for a concern because it is wise
to keep the liquid assets at least equal to the liquid liabilities at all time. Liquid
assets are those assets, which can be readily converted into cash and will include
cash balance, bills receivable, sundry debtors, and short-term investments.
Inventories and prepaid expenses are not included in liquid assets because the
emphasis is on the ready availability of cash in case of liquid assets. Liquid
liabilities include all items of current liabilities except bank overdraft. This ratio is
the “acid test” of a concerns financial soundness.
3. Super Quick or Absolute liquidity Ratio: - Though receivable are generally
more liquid than inventories, there may be debts having doubt regarding their
realization in time. So, to get idea about the absolute liquidity of a concern, both
receivables and inventories are excluded from current assets and only absolute
liquid assets, such as cash in hand, cash at bank and readily realizable securities are
taken into consideration. Absolute liquidity ratio is computed as follows:
Cash in hand and at bank + short terms marketable securities
Super Quick Ratio =
Current liabilities
Or
Current Assets – Stock – Bills Receivable
Current liabilities – Bank overdraft – Bills Payable
The desirable norm for this ratio is 1:2, i.e., Rs. 1 worth of absolute liquid assets
are sufficient for Rs 2 worth of current liabilities. Even though the ratio gives a
more meaningful measure of liquidity, it is not in much use because the idea of
keeping large cash balance or near cash items has long since been disapproved.
Cash balance yields no return and as such is barren.
4. Cash Ratio: - Since cash is the most liquid assets, a financial analyst may
examine cash ratio and its equivalent to current liabilities. Trade investment or
marketable securities are equivalent of cash; therefore, they may be included in the
computation of cash ratio:
Cash + Marketable Securities
Cash ratio =
Current Liabilities
5. Ratio of inventory to working Capital: - In order to ascertain that there
is no overstocking; the ratio of inventory to working capital should be computed. It
is worked out as follows:
Inventory
Ratio of inventory to working Capital =
Working Capital
Working capital is the excess of current assets over current liabilities. Increase in
volume of sales requires increase in size of inventory, but from a sound financial
point of view, inventory should not exceed amount of working capital. The
desirable ratio is 1:1.
Leverage Ratio / Solvency Ratio
Long term creditors like debenture holders, financial institution etc., are more
concerned with long-term financial strength of an enterprise. The leverage/ capital
structure ratios are very helpful in judging the long-term solvency position of an
enterprise. Leverage ratio may be calculated from the Balance Sheet items to
determine the proportion of debt in total financing. Many variations of these ratios
exist; all these ratios indicate the same thing i.e., the extent to which the enterprise
has relied on debt in financing assets. Leverage ratios are also computed from the
income statement items by determining the extent to which operating profits are
sufficient to cover the fixed charges. The important long-term
solvency/leverage/capital structure ratios are as follows:
1. Debt-Equity Ratio: - This ratio relates debts to equity or owners funds. Here,
Equity is used in a broader sense as net worth (i.e., capital + retained earnings)
while debt normally means long-term interest bearing loans.
Debt (Long-term) Total Debt Outsider fund
Debt-Equity Ratio = Or Or
Equity Net Worth Shareholder fund
External equities are outsiders fund while internal equities represent
shareholders funds. Outsiders’ fund includes Long-term debt / liabilities.
Shareholders funds or equity consists of preference share capital, equity share
capital, profit & loss a/c (Cr. Balance), Capital reserves, revenue reserves and
reserves representing marked surplus, like reserves for contingencies, sinking
funds for renewal of fixed assets or redemption of debentures etc., less fictitious
assets. In other words, shareholders funds or equity is equal to Equity share
capital + preference share capital + reserves & surplus etc.
This ratio is very useful for analysis for long-term financial
condition. This ratio signifies the excess of proprietor’s funds over outsiders’ funds
and thereby indicates the soundness of the financial / capital structure of the
business enterprise.
2. Proprietary Ratio: -This ratio indicates the relationship between proprietary fund
and total assets. The Proprietary funds include Equity Share Capital, Preference
Share Capital, Revenue, Capital Reserves and accumulated surplus. Total Assets
include Fixed, Current and Fictitious assets.
This ratio is very important for the creditors, because they know the share of
Proprietors Funds in the total assets and satisfy how far their loan is secured. The
higher the ratio, the more safety will be to the creditor. The ratio also shows the
general financial position of the company also. 50% is supposed to be the
satisfactory Proprietary Ratio for the creditors. Less than 50% is the sign of risk for
creditors. The following formula is used to calculate Proprietary Ratio: -
Shareholders funds Proprietor’s Fund
Proprietary Ratio = Or
Total Tangible Assets Total Assets
(Total Assets = Fixed Assets + Current Assets)
3. Debt Ratio: - Several debt ratios may be used to analyze the long-term solvency
of an enterprise. The enterprise may be interested in knowing the proportion of the
interest bearing debt (also called funded debt) in the capital structure. It may,
therefore, compute debt ratio by dividing total debt by capital employed or net
assets.
Total Debt
Debt Ratio =
Total Debt + Net Worth
4. Capital Employed to Net Worth Ratio: - There is yet another alternative way of
expressing the basic relationship between debt and equity. One may want to know,
how much funds are being contributed together by lenders and owners for each
rupee of the owners contribution. This can be found out by calculating the ratio of
capital employed or net assets or net worth.
Capital Employed
Capital Employed to Net Worth Ratio =
Net Worth
(Capital Employed = Shareholders fund + Long-term liabilities)
Activity or Turnover Ratio
These ratios are very important for a concern to judge how well facilities at the
disposal of the concern are being used or to measure the effectiveness with which a
concern uses its resources at its disposal. In short, these will indicate position of
assets usage. These ratios are usually calculated on the basis of sales or cost of
sales and are expressed in integers rather than as a percentage. Such ratios should
be calculated separately for each type of assets. The greater the ratio more will be
efficiency of assets usage. The lower ratio will reflect underutilization of the
resources available at the command of concern. The concern must always plan for
efficient use of the assets to increase the overall efficiency. The following are the
important activity or turnover ratios usually calculated by a concern:
1. Sales to capital Employed (or Capital Turnover) Ratio: - This ratio shows
the efficiency of capital employed in the business by computing how many times
capital employed is turned over in a stated period. The ratio ascertained as follows:
Sales
Sales to capital Employed Ratio =
Capital Employed
(Shareholders Fund +Long-term Liabilities)
The higher the ratio, the greater are the profits. A low capital turnover ratio would
mean that sufficient sales are not being made and profits are lower.
2. Sales to Fixed Assets (or Fixed Assets turnover) Ratio: - This ratio measures
the efficiency of the assets use. The efficient use of assets will generate greater
sales per rupee invested in all the assets of a concern. The inefficient use of the
assets will result in low sales volume coupled with higher overhead changes and
under utilization of the available capacity. Hence the management must strive for
using total resources at optimum level, to achieve higher ratio. This ratio expresses
the number of times fixed assets are being turned over in a stated period. It is
calculated as under:
Sales
Sales to Fixed Assets =
Net Fixed Assets
(Net Fixed Assets = Fixed Assets Less Depreciation)
This ratio shows how well the fixed assets are being used in the business. The
ratio is important in case of manufacturing concern because sales are produced not
only use of current assets but also by amount invested in fixed assets. The higher in
the ratio, the better is the performance. On the other hand, a low ratio indicates that
fixed assets are not being efficiently utilized.
3. Sales to working capital (or Working Capital Turnover) Ratio: - This ratio is
shows the number of times working capital is turnover in a stated period. It is
calculated as below: -
Sales
Sales to working capital Ratio =
Net Working Capital
(Net Working Capital = Current Assets – Current Liabilities)
The higher is the ratio, the lower is the investment in working capital and the
greater are the profits. However, a very high turnover of working capital is a sign
of overtrading which may put the concern into financial difficulties. On the other
hand, a low working capital turnover ratio indicates that working capital is not
efficiently utilized.
4. Total Assets Turnover Ratio: - This ratio is calculated by dividing the net sales
by the value of total assets.
Net Sales
Total Assets Turnover Ratio =
Total Assets
(Total Assets = Net Fixed Assets + Investments + Current Assets)
A high ratio is an indicator of overtrading of total assets while a low ratio reveals
idle capacity. The traditional standard for this ratio is two times.
5. Inventory or Stock Turnover Ratio: - This ratio indicates the number of times
inventory is rotated during the year. It is calculated as follows:
Tangible Fixed Assets and Intangible Assets + Current Assets – Current
Liabilities.
This ratio considered being the most important ratio because it reflects the overall
efficiency with which capital is used. This ratio is a helpful tool for making capital
budgeting decisions; a project yielding higher return is favored.
6. Return on Investment (ROI): - The term investment may refer to total assets
or net assets. The funds employed in net assets are known as capital employed.
Net Assets = Net Fixed Assets + Current Assets – Current Liabilities (excluding
Bank loans) Or
Capital Employed – Net Work + Debt.
Earning Before Interest and Tax (EBIT)
I. Return on Investment =
Net Assets or Capital Employed
Higher the ratio, better it is.
CHAPTER II
Research Methodology
1) Introduction
2) Types of research methodology
3) Objective of study
4) Scope and limitations of study
2.1) Introduction
Research methodology is a way to systematically solve the research problem. It may be understood as a science of studying now research is done systematically. In that various steps, those are generally adopted by a researcher in studying his problem along with the logic behind them.
It is important for research to know not only the research method but also know methodology. ”The procedures by which researcher go about their work of describing, explaining and predicting phenomenon are called methodology.”
Methods comprise the procedures used for generating, collecting and evaluating data. All this means that it is necessary for the researcher to design his methodology for his problem as the same may differ from problem to problem.
Data collection is important step in any project and success of any project will be largely depend upon now much accurate you will be able to collect and how much time, money and effort will be required to collect that necessary data, this is also important step. Data collection plays an important role in research work. Without
proper data available for analysis you cannot do the research work accurately.
2.2) Types of data collection
There are two types of data collection methods available.
Primary data collection Secondary data collection
1) Primary data
The primary data is that data which is collected fresh or first hand, and for first time which is original in nature. Primary data can collect through personal interview, questionnaire etc. to support the secondary data.
2) Secondary data collection method
The secondary data are those which have already collected and stored. Secondary data easily get those secondary data from records, journals, annual reports of the company etc. It will save the time, money and efforts to collect the data. Secondary data also made available through trade magazines, balance sheets, books etc.
This project is based on primary data collected through personal interview of head of account department, head of SQC department and other concerned staff member of finance department. But primary data collection had limitations such as matter confidential information thus project is based on secondary information collected through five years annual report of the company, supported by various books and internet sides. The data collection was aimed at study of working capital management of the company
Project is based on
Annual report of SECL 2005-06 Annual report of SECL 2006-07 Annual report of SECL 2007-08 Annual report of SECL 2008-09 Annual report of SECL 2009-10
2.3) OBJECTIVES OF THE STUDY
Study of the working capital management is important because unless the working capital is managed effectively, monitored efficiently planed properly and reviewed periodically at regular intervals to remove bottlenecks if any the company cannot earn profits and increase its turnover. With this primary objective of the study, the following further objectives are framed for a depth analysis.
To study the working capital management of SECL. To study the optimum level of current assets and current liabilities of the
company. To study the liquidity position through various working capital related
ratios. To study the working capital components such as receivables accounts, cash
management, Inventory position etc. To study the way and means of working capital finance of the SECL. To estimate the working capital requirement of SECL. To study the operating and cash cycle of the company. To examine the effectiveness of working capital management polices with
the help of accounting ratio.
To evaluation the financial performance of the company.
To make suggestions for policy makers for effective management of
working capital.
2.4) SCOPE & LIMITATIONS OF THE STUDY
Scope of the study
The scope of the study is identified after and during the study is conducted. The study of working capital is based on tools like trend Analysis, Ratio Analysis, working capital leverage, operating cycle etc. Further the study is based on last 5 years Annual Reports of Jain Irrigation Systems Ltd. And even factors like competitor’s analysis, industry analysis were not considered while preparing this project.
Limitations of the study
Following limitations were encountered while preparing this project:
1) Limited data:-
This project has completed with annual reports; it just constitutes one part of data collection i.e. secondary. There were limitations for primary data collection because of confidentiality.
2) Limited period:-
This project is based on five year annual reports. Conclusions and recommendations are based on such limited data. The trend of last five year may or may not reflect the real working capital position of the company.
3) Limited area:-
Also it was difficult to collect the data regarding the competitors and their financial information. Industry figures were also difficult to get.
CHAPTER III
INTRODUCTION OF COMPANY
INTRODUCTION
Coal has been and shall remain the prime source of commercial energy in India. It
meets nearly 60 % of the total commercial energy requirement of our country. Since
coal India contributed almost 90 % of the coal produced in the country it can be
perceived to be the synonym of Indian coal industry. India is currently the third largest
coal producing country in the world after China & U.S.A. The Coal India has to play
a significant role in shaping the destiny of industries of the nation at large. We
currently witness changes that are sweeping economic & social life of our
country, as well as, that of the world. Products, services and manufacturing goods
or no longer limited to any national boundary but are getting across to countries
where they find acceptance. The liberalization and the economic reforms initiated
in our country, in real earnest, since the mid of 1991,are attempt to bring India in to the
economic main stream of global market. Performance for the competence, if I
may say so, is the key word for any company or corporation. Undoubtedly these
moves effect our life, as well as our thinking.
History of Coal Industry in India:
Figure: 2 A vision of coal mine.
Coal and oil are two primary natural fuels. Coal constitutes approximately 85% of
total fossil fuel reserves in the world. The Gondwana coal contributes about 99%
of the country’s coal resources. They are located in peninsular India and the too in
the southeastern quadrant bounded by 78 E longitudes & 24 N latitude, thus
leaving a major part of country devoid of any coal deposits. The major Gondwana
Coalfields are represented by isolated basins, which occur along prominent present
day rivers viz Damodar, Sone, Mahanadi, and Kanhan & Godavari. The relative
minor resources of tertiary coal are located on the either extremities of peninsular
4. Central Coal Fields Ltd. 1975 Ranchi (Jharkhand)
PRIOR TO 1972-73 197OS EARLY
1990 S1996 2000-06
MOSTLY IN PRIVATE HANDS EXCEPT FOR TWO PUBLIC SECTOR UNITS NAMELY SCCL & NCDC
. 1972-73 COAL MINES NATIONALISATION ACT.1975 CIL FORMED AS HOLDING COMPANY WITH 6 SUBSIDIARIES
DEVELOPMENTS IN COAL INDUSTRY
.1993 AMEDMENT IN ACT TO ALLOW CAPTIVE MINING BY PRIVATE OPERATOR AND NOT FOR SALE.1995-96 BUDGETORY SUPPORT WITHDRAWN
INTEGRATED FUEL POLICY- TO BRING COMPETETION- DECONTROL OF PRICE & DISTRIBUTION
COAL MINES (NATIONALISATION) AMENDMENT BILL -.PRICING AND DISTRIBUTION FULLY DEREGULATED (COLIERY CONTROL ORDER 2000). BUDGET06-07SOME CIL BLOCK OPENED OR CAPTIVE MINING
5. Western Coal Fields Ltd. 1975 Nagpur (Maharashtra)
6. South Eastern Coal Fields Ltd. 1986 Bilaspur (Chhattisgarh)
Inventory Turnover Ratio=Cost of Goods SoldAverage Inventory
Inventory Holding Period= 365Inventory Turnover Ratio
Particulars 2007-08 2008-09 2009-10Inventory Turnover Ratio
9.82 13.45 9.70
Days of Holding Inventory
37.17 27.14 37.62
2.5
7.5
12.5
17.5
22.5
27.5
32.5
37.5
Inventory Holding Period
3. Management of Cash –
Size of Indices of Cash
Particulars 2007-08 2008-09 2009-10Cash and Bank 3996.21 5451.36 6995.23Indices 100 136.41 175.05
1030507090
110130150170190
Size of Cash Indices
Cash Cycle
Particulars 2007-08 2008-09 2009-10 Inventory Holding Period
37.17 27.14 37.62
+ Average Receivable Period+ Average Payment PeriodCash Cycle
1030507090
110130150170190
Cash Cycle
Conclusion
Working capital management is important aspect of financial management. The study of working capital management of Jain Irrigation system ltd. has revealed that the current ration was as per the standard industrial practice but the liquidity position of the company showed an increasing trend. The study has been conducted on working capital ratio analysis, working capital leverage, working capital components which helped the company to manage its working capital efficiency and affectively.
· Working capital of the company was increasing and showing positive working capital per year. It shows good liquidity position.
· Positive working capital indicates that company has the ability of payments of short terms liabilities.
· Working capital increased because of increment in the current assets is more than increase in the current liabilities.
· Company’s current assets were always more than requirement it affect on profitability of the company.
· Current assets are more than current liabilities indicate that company used long term funds for short term requirement, where long term funds are most costly then short term funds.
· Current assets components shows sundry debtors were the major part in
current assets it shows that the inefficient receivables collection management.
· In the year 2006-07 working capital decreased because of increased the expenses as manufacturing expenses and increase the price of raw material as increased in the inflation rate.
· Inventory was supporting to sales, thus inventory turnover ratio was increasing, but company increased the raw material holding period.
· Study of the cash management of the company shows that company lost control on cash management in the year 2005-06, where cash came from fixed deposits and ZCCB funds, company failed to make proper investment of available cash.
Recommendations
Recommendation can be use by the firm for the betterment increased of the
firm after study and analysis of project report on study and analysis of working
capital. I would like to recommend.
· Company should raise funds through short term sources for short term
requirement of funds, which comparatively economical as compare to
long term funds.
· Company should take control on debtor’s collection period which is
major part of current assets.
· Company has to take control on cash balance because cash is non
earning assets and increasing cost of funds.
· Company should reduce the inventory holding period with use of zero
inventory concepts.
Over all company has good liquidity position and sufficient funds to repayment
of liabilities. Company has accepted conservative financial policy and thus maintaining more current assets balance. Company is increasing sales volume per year.
APPENDICES
Bibliography
Books Referred
ß I. M. Pandey - Financial Management - Vikas Publ ishing House Pvt. Ltd. - Ninth Edition 2006
ß M.Y. Khan and P.K. Jain, Financial management – Vikas Publishing house ltd., New Delhi.
ß K.V. Smith- management of Working Capital- Mc-Grow- Hill New York
ß Satish Inamdar- Principles of Financial Management- Everest Publishing House