CHAPTER: 1

INTRODUCTION TO THE STUDY

Sugar industry is an important agro-based industry that impacts rural livelihood of

about 50 million sugarcane farmers and around 5 lakh workers directly employed in
sugar mills. Employment is also generated in various ancillary activities relating to
transport, trade servicing of machinery and supply of agriculture inputs. India is the
second largest producer of sugar in the world after Brazil and is also the largest
consumer. Today Indian sugar industry’s annual output is worth approximately Rs.80,000
crores. There are 732 installed sugar factories in the country as on 31.07.2017, with
sufficient crushing capacity to produce around 339 lakh MT of sugar. The capacity is
roughly distributed equally between private sector units and cooperative sector units.

Kranti Sugar Company in kundal tal-Palus, Dist-Sangli is one of the leading

businesses in the Sugar Manufacturers. Leaders of freedom fighters Dr. G. D. Bapu Lad
founded the Kranti Co-operative Sugar Factory by overcoming many difficulties. It was a
big challenge to establish a sugar mill in drought-affected areas of Sangli district. The
first batch of crop of the factory took place in 2002-2003. Now it is leading business in
the sugar Manufacturing sector.

 STATEMENT OF THE STUDY

“A Study on Working capital Management with special reference to Kranti Sugar
Industries, Kundal ”.

 
 OBJECTIVES OF STUDY 

1)To Study the overall working of the organization. i.e. To study the concept of working
capital management.
 2) To study the efficiency of working capital management of the company.
3) To study the efficiency of cash, inventory and receivables management of the
company.
 4) To understand and analyze the working capital position of  Kranti sugar factory.
During the period of 2016 to 2020.
 5) To measure the overall financial position of the organization with the help of ratio
analysis.

THE WORKING CAPITAL NEED ARISES FOR THE FOLLOWING

PURPOSE 
  For purchasing raw materials, components and spare parts • For paying wages
and salaries • To increase day-to-day expense and overhead costs like fuel, power and
office expense etc. • To meet selling costs of packing advertising etc… • To provide
credit facilities to customers 

 SCOPE OF STUDY

 Since the decision regarding working capital are of an operating nature not one
time decision, the scope of the study is geared towards identifying important areas of
control and to establish model for better control of the various components of working
capital The study would also attempt to identify the various sources available for
financing of working capital. The study gives a fair idea of improvement in efficiency of
working capital management and also to have proper control over the components of
working capital and managing of efficiency.

SOURCES OF DATA

SECONDARY DATA
Secondary data refers to data that is collected by someone other than user. It is
collected by and readily available from other sources. Secondary data were collected
from various sources including the annual reports of the company for the year 2016-17,
2017-18, 2018-19, 2019-20 and 2020-21. 

 LIMITATION OF THE STUDY 

 This study deals only with the data made available. Hence the result of this
study cannot judge the business of the firm in general • The study have been influenced
by the limitation of the ratio analysis • The study extensively uses the data provided is
the financial reports of the firm which may also have their own limited perspective • The
analysis made on the working capital management is for a particular period of time the
current assets and current liabilities will change for an analysis made at any other of
time. 

CHAPTER: 2
 COMPANY PROFILE

Name Krantiagrani Dr. G.D. Bapu Lad Sahakari Sakhar    Karkhana Ltd,
Kundal, Maharashtra

Business Type Sugar Manufacturer

Year of 2002-03
Establishment

Revenue

Founder Dr. G.D. Bapu Lad

Chairman Mr. Arun Ganpati Lad

Address of Branch Kundal Tal: Palus Dist.: Sangli.

City Kundal

State Maharashtra

Country India

Leaders of freedom fighters Dr. G. D. Bapu Lad founded the Kranti Co-operative
Sugar Factory by overcoming many difficulties. It was a big challenge to establish a
sugar mill in drought-affected areas of Sangli district. The first batch of crop of the
factory took place in year 2002-2003. After the successful start of the Factory, it was
necessary to increase the production of sugarcane. But this challenge was overcome by
farsightedness of baapu and then he took up the most difficult task of increasing the
production of Sugarcane. For this, first of all, he established the independent Sugarcane
Development Department. In the last 10 years, he and Arun Lad have changed the way of
Sugarcane farming radically in the area.

History:

15 August 1947 Indians saw the first light of freedom after a persistent struggle
and sacrifice by our freedom fighters against a brutal rule of the British during one brave
movement of 1942 he as a field marshal of the Satara Prati-Sarkar breve men shook the
very foundation of British Raj in the satara district of Maharashtra this avenging line was
ready to sacrifice everything for his motherland sanyukta Maharashtra and Olin and
similar ha this man took his team in to acquaintance with his visionary charm he
empowered the common people this Indian visionary is dr. JD Bapu lad the Maharashtra
government remembers can teasing naina bottle and doctor GD babul are in the form of
Memorial on the side of sugar factory during 1972 draught in Maharashtra Babu made
necessary assignments to fulfil the dire needs of farmers and made proper implication to
supply water to Kundal area he strongly advocated modernization in agriculture and thus
in a way introduced the Green Revolution in Maharashtra he along with Mr. Arun Anaa
accomplished their target of establishing a sugar factory this dream changed the
uncontrolled pricing of sugar into a legitimate one under his leadership offices and
departments for the development of sugarcane were introduced soy testing the bio
pesticides fertilizers adhered according to soil conditions and overall management
resulting in achieving the foot mark of applying products at the best rates he introduced
the drip irrigation to ensure water saving and maintenance of soil fertility and moisture
content his belief in modernization has led him to cast agricultural schemes mobile phone
applications and many more which further went to increase the production of the Sugar
Factory in manifold Mr. transistor deliver fuller yourself a nobody Gigi's of Panigale
Joseph result financier of the deliciousness of Annisa logically then he can fail killing
would further over only and it's over us we cherish the ketchup for any chance it can
dilute for the world it has succeeded in yes, we will well also ticket cell for original
general failure small-scale industries like Kranti milk and Kranti common are established
to help women to earn their living and support their families he believed that education is
an important step towards an independent nation and work for the proper education of all
sectors of society through various branches of Gandhi education society by improvising
to digital classrooms teacher training parent-teacher interaction and all of these in an
affordable price for the poor and need the initiative project grantee has already helped a
lot of students in Federation's for competitive exams with facilities like library a large
reading hall and Internet facilities Nana Patel varsity guru accommodates an educated
spooler and often children till they complete their education keeping in mind the tradition
of wrestling in Babu's beloved kundal when his wrestling matches are being organized
with training facilities to promote sports Kranti also encourages humanism by honouring
social activists with grunty a granny put a scar Kranti organizes various health camps to
promote health awareness also activities like Shiva Theory grantee patches are being held
for the farmers these revolutionary moments are channelling employment to you
empowering women justice for farmer and common people therefore the co-operative
sugar factory established by county attorney dr. GD popular and its other institutions and
sector have been an integral part of the society this legacy of Babu's trouble for justice his
leadership qualities loyalty stewards society and foresight for the future have been
continued by a great personality Mr. Arun Anaa Babu's work for the society has been and
always will be a source of motivation to the upcoming generation of the nation.

Vision:

To produce excellent quality of sugar and distillery products. To provide employment to

rural people. To be a world‐class organization. To be an integrated bio refinery. To be the
leading integrated producer of sugar and downstream products. To understand and exceed
customer needs and expectations.

Mission: 

 To be the leader in our chosen business area, create an organization that all our
constituents are proud to be associated with, set benchmarks that will become the
standard for others to emulate and through ethical business practices create wealth for our
stakeholders.

Goals:

         We believe that sugar sector holds immense potential in providing food & energy
security for the country which is going to be one of the most important developmental
prerequisites in next 5-10 years. This potential can only be realized with the right mix of
regulations, connect with the farmers, modernization and professionalization of the
industry. We are committed to working towards making this happen.

BOARD OF MEMBERS:

Mr. Arun Ganpati Lad Chairman

Mr. S.P. Jadhav Manager

 Mr.Prasad Swami Accountant

Mr.Sushant Devnal C.A

Mr.Sachin Manglekar Member

 ORGANIZATION STRUCTURE:

Chairman

Manager

Accountant

Junior Assistant

Workers

CHAPTER: 3

THEORETICAL BACKGROUND

3.1 INTRODUCTION :-

Working capital may be regarded as the lifeblood of a business. Its effective

provision can do much to ensure the success of business.
 A study of working capital is of major importance to internal & external analysis
because of its close relationship with the current day-to-day operation of a business.

Every business needs funds for two purpose long term funds are required to
create production facilities through purchase of fixed assets such as plants, machineries
land, building etc. Investments in these assets represent that part of firms capital which
is blocked an a permanent or fixed basic & is called fixed capital. Funds are also needed
for short term purposes for the purchase of raw materials, payment of wages & other
day-to-day expenses etc. These funds are Known as working capital.

Its inefficient management can lead not only to loss of profits but also to the
downfall of a business.

Working capital management is an important part of the financial marketing.

Working capital is defined as current assets minus current liabilities. Working capital is
also need for to increasing profitability & maintain liquidity of the concern.

The basis components of working capital re cash or near cash assets accounts
receivable, inventories & accounts payable . Working capital management is there fore
with managing all the above constituents.

Working capital also know as net Working capital & is defined as;

"Net working capital - Current assets - Current liabilities "

Current Assets –

Current assets are which are expected to be sold or otherwise used witch one
fiscal year cash equivalents, accounts receivable, inventory prepaid accounts which will
be used within a year & short term investment.

Current Liabilities –
 Current liabilities are considered as liabilities of the business that are to be
settled in cash with the fiscal year. Current liabilities includes accounts payable for
goods, services or suppliers, short term

loans, long term loans with maturity within one year, dividends & interest payable or
accrued liabilities such as accrued taxes.

3.2 DEFINITIONS :-

1) Working capital means current assets

--- mead, malot & field.

2) The sum of current assets is the working capital of a business.

--- J.S.Mill.

3) Working capital refers to the investment by a company in short term assets such as
cash marketable securities accounts receivables & inventories.

--- Weston & brigham.

4) Working capital is that capital which is not fixed but the more common use of the
working capital is the consider it as difference between the book value of the current
assets & current liabilities.

--- Hoagland.

5) Circulating or working capital means current assets of the company that are changed
in the ordinary course of business from one of form in to another form.

---Geresten berg.

6) Working capital is the amount of funds necessary to cover the cost of operating the
enterprise.
 --- Shubin.

3.3 CLASSIFICATION OF WORKING CAPITAL :-

There are two concept of working capital

1) Gross working capital.

2) Net Working capital.

1) GROSS WORKING CAPITAL:-

It refers to the firms investment in total current or circulating assets.

2) NET WORKING CAPITAL:-

Difference between current assets & current liabilities is called as net working
capital.
Gross working capital usually referred to as working capital represents
investment in current assets such as marketable securities, inventories & bills receivable
etc.
Net working capital represents the difference between current assets &current
liabilities.
Current assets are those assets which are normally converted into cash within
one year.
Current liabilities are those claims of out siders which are expected to mature for
payment within one year & include creditors bills payable, bank overdraft & expense
outstanding.
The net working capital can be positive or negative. When current assets exceed
current liabilities, the net working capital become positive. When current liabilities
exceed current assets the net working capital become negative.

3)Positive concept of net working capital –

Current assets> current liabilities

4) Negative concept of net working capital –

 Current assets < Current liabilities

The net concept of working capital may be suitable only for property form of
organizations-sole trader, partnership firm, etc. The gross concept of working capital is
suitable to the company form of organizations..

CIRCULATING CAPITAL –

working capital is also known as circulating capital or current capital. " The use of
the term circulating capital instead of working capital indicates that its flow is circular in
nature".

3.3 SOURCE OF WORKING CAPITAL –

Conventional generalizations relating to financing of working capital suggest that

an amount equal to the basic minimum of current assets should be financed from long-
term source and that only seasonal needs of working capital should be financed from
short-term sources. It is obvious that such an arrangement helps to keep the cost of
working capital finance to the minimum for an enterprise and gives a rise to its rate of
return on the total funds employed. Viewed thus, the sources of working finance can be
classified into permanent and the current sources of working capital finance.
3.4 CLASSIFICATION OF WORKING CAPITAL -

The quantitative concept of Working Capital is known as gross working capital

while that under qualitative concept is known as net working capital. Working capital
can be classified in various ways. The important classifications are as given below :

1. CONCEPTUAL CLASSIFICATION :-

There are two concept of working capital, quantitative and qualitative. The
quantitative concept take into account as the current assets while the qualitative
 concept takes into account the excess of current assets over current liabilities. Deficit
of working capital exists where the amount of current liabilities exceeds the amount
of current assets. The above can be summarized as follows :

(i) Gross Working Capital Total Current Assets

(ii) Net Working Capital Excess of Current Assets over Current Liabilities.
(iii) Working Capital Deficit Excess of Current Liabilities over Current Assets.

2. CLASSIFICATION ON THE BASIS OF FINANCIAL REPORTS :-

The information of working capital can be collected from Balance Sheet or Profit
and Loss Account ; as such the working capital may be classified as follows:

1. CASH WORKING CAPITAL -

This is calculated from the information contained in profit and loss account. This
concept of working capital has assumed a great significance in recent years as it shows
the adequacy of cash flow in business. It is based on Operating Cycle Concept's which is
explained later in this chapter.

2. BALANCE SHEET WORKING CAPITAL -

The data for Balance Sheet Working Capital is collected from the balance sheet.
On this basis the Working Capital can also be divided in three more types, gross Working
Capital, net Working Capital and Working Capital deficit.
CLASSIFICATION ON THE BASIS OF VARIABILITY :-

Gross Working Capital can be divided in two categories (i) permanent or fixed
working capital and (ii) Temporary, Seasonal or variable working capital. Such type of
classification is very important for hedging decisions

1. TEMPORARY WORKING CAPITAL –

Temporary Working Capital is also called as fluctuating or seasonal working capital.

This represents additional investment needed during prosperity and favourable seasons.
It increases with the growth of the business. "Temporary working capital is the
additional assets required to meet the variations in sales above the permanent level
"This can be calculated as follows:

Temporary Working Capital Total Current Assets-permanent Current Assets.

2. PERMANENT WORKING CAPITAL –

It is a part of total current assets which is not changed due to variation in sales.
There is always a minimum level of cash, inventories, and accounts receivables which is
always maintained in the business even if sales are reduced to a minimum. Amount of
such investment is called as permanent working capital. "Permanent Working Capital is
the amount of working capital that persists over time regardless of fluctuations in sales."
This is also called as regular working capital.
3.5 SIGNIFICANCE OF WORKING CAPITAL MANAGEMENT –

Funds are needed in every business for carrying on day-to-day operations.

Working capital funds are regarded as the life blood of a business firm. A firm can exist
and survive without making profit but cannot survive without working capital funds. If a
firm is not earning profit it may be termed as 'sick' but, not having working capital may
cause its bankruptcy working capital in order to survive. The alternatives are not
pleasant. Bankruptcy is one alternative. Being acquired on unfavorable term as another.
Thus, each firm must decide how to balance the amount of working capital it holds,
against the risk of failure." Working capital has acquired a great significance and sound
position in the recent past for the twin objects of profitability and liquidity. In period of
rising capital costs and scare funds, the working capital is one of the most important
areas requiring management review.

It is rightly observed that, "Constant management review is required to appropriate

levels in the various working capital accounts." Mainly the success of a maintain concern
depends upon proper management of working capital so" working capital management has
been looked upon as the driving seat of financial manager. " It consumes a great deal of time to
increase profitability as well as to maintain proper liquidity at minimum risk. There are many
aspects of working capital management which make it an important function of the finance
manager. In fact we need to know when to look for working capital funds, how to use them and
how measure. plan and control them.

A study of working capital management is very important for internal and

external experts Sales expansion, dividend declaration, plants expansion, new product
line, increase in salaries and wages, rising price level, etc., put added strain on working
capital maintenance Failure of any enterprise is undoubtedly due to poor management
and absence of management skill.
IMPORTANCE OF WORKING CAPITAL MANAGEMENT STEMS FROM TWO REASONS,

(i) A substantial portion of total investment is invested in current assets, and

(ii) level of current assets and current liabilities will change quickly with the
variation in sales.

Though fixed assets investment and long-tem borrowing will also response to the
changes in sales, but its response will be weak.

3.6 METHODS OF ESTIMATING WORKING CAPITAL -

There are two methods which are usually followed in determining working capital
requirements. There are:

1. CONVENTIONAL METHOD :-

According to the conventional method cash inflows and outflows are matched
with each other. Greater emphasis is laid on liquidity and greater importance is attached
to current ratio, liquidity ratio, etc, which pertains to the liquidity of a business.

2. OPERATING CYCLE METHOD :

In order to understand what gives rise to differences in the amount of timing of

cash flows, one should first think of the length of time which is required to convert cash
into resources, resources into final product, final product info receivables receivable
back into cash. The length of the operating cycle is a function of a nature of a business.
There are four major companies of the operating cycle of a manufacturing company
These are: CAMS Journal of Business Studies and Research ISSN: 0975-7953 July -
September

The cycle starts with free capital in the form of cash and credit, followed by investment
in materials, manpower and other services. Production phase.
 Storage of the finished products terminating at the time finished product is sold
Cash or accounts receivables collection period, which results in and ends at the point of
inv ment of the free capital originally committed. New free capital then becomes
available for productive reinvestment. When new liquid capital becomes available for
recommitment to productive activity, a new operating cycle begins.

3. CASH COST TECHNIQUE : -

In this method, all transactions are shown in the working capital foreca st on cost
basis. For forecasting working capital, the following information is required. Costs to be
defrayed on materials, wages and overheads.

Length of which time during raw materials are to remain in stock before they are put to
production.

Length of production cycle.

Length of sale cycle denoting the period of time finished goods have to stay in the ware
house before sale.

Period of credit availed of from creditors.

Time-lag involved in the payment of wages and overhead expenses.

4. BALANCE SHEET METHOD :

In this method a forecast is made of the various assets and liabilities. Thereafter,
the difference between the two is taken out the difference will indicate the deficiency or
surplus of cash.
3.7 PRINCIPLES OF WORKING CAPITAL MANAGEMENT -

The following are the principles of working capital management:

1) PRINCIPLES OF THE RISK VARIATION :-

Risk here refers to the inability of firm to maintain sufficient current assets to pay
its obligations. If working capital is varied relative to sales, the amount of risk that a firm
assumes is also varied and the opportunity for gain or loss is increased. In other words,
there is a definite relationship between the degree of risk and the rate of return. As a
firm assumes more risk, the opportunity for gain or loss increases. As the level of
working capital relative to sales decreases, the degree of risk increases. When the
degree of risk increases, the opportunity for gain and loss also increases. Thus, if the
level of working capital goes up, amount of risk goes down, and vice-versa, the
opportunity for gain is like-wise adversely affected.

2) PRINCIPLE OF EQUITY POSITION :

According to this principle, the amount of working capital invested in each
component should be adequately justified by a firm's equity position. Every rupee
invested in the working capital should contribute to the net worth of the firm.

3) PRINCIPLE OF COST OF CAPITAL :

This principle emphasizes that different sources of finance have different cost of
capital. It should be remembered that the cost of capital moves inversely with risk. Thus,
additional risk capital results in decline in the cost of capital.

4) PRINCIPLE OF MATURITY OF PAYMENT :

A company should make every effort to relate maturity of payments to its flow of
internally generated funds. There should be the least disparity between the maturities
of a firm's short-term debt instruments and its flow of internally generated funds,
because a greater risk is generated with greater disparity. A margin of safety should,
however, be provided for any short-term debt payment.

3.8 NEED FOR WORKING CAPITAL -

Working capital is also need for to increasing, profitability & maintain liquidity of
the concern.

Management of working capital is needed for the success of business.

OPERATING CYCLE: -
The time gap between the sales & their actual realization in cash clear that
working capital is required because of the time gap between the sales & It is their actual
realization in cash. This time gap is technically termed as "Operating Cycle of the
business.

The operating cycle is the length of time necessary to complete the following cycle
of events.

1) Conversion of cash into raw materials.

2) Conversion of raw materials into work in process.

3) Conversion of work in process into finished goods.

4) Conversion of finished goods into account receivable.

5) Conversion of account receivable into cash.

This cycle will be repeated again & again. The operating cycle of manufacturing
business can be shown as in be following chart.
Ctc
sh
a
m
w
R
eirlA
u
o
b
v
n
F
G
d
k
W
g
p

Operating cycle of a Manufacturing business in the case of a trading firm.

The Operating cycle will include the length of the time required to convert.

1) Cash into inventories.

2) Inventories into account receivable.

3) Account receivable into cash –

In the case of a financing firm –

The operating cycle includes the length of time taken to convert.

1) Conversion of cash into debtors

2) Conversion of debtors into cash.

3.9 MANAGEMENT OF WORKING CAPITAL

OBJECTIVES :
The basic objectives of working capital management is to manage the
firms current assets & current liabilities, in such a way that the satisfactory level of
working capital maintained that is. It is neither inadequate nor excessive.

Working capital management policies have a great effect on a firms profitability,

liquidity & structural health.

A finance manager should there four chalk out appropriate working capital
management policies in respect of each of the components of working capital so as to
ensure higher profitability, proper liquidity & sound structural health of the
organization.

3.10 FACTORS INFLUENCING WORKING CAPITAL NEEDS -

1. NATURE OF BUSINESS -
The amount of working capital is basically related to the nature and
volume of the business. In concerns, where the cost of raw materials to be used in the
manufacture of a product is very large in proportion to its total cost of manufacture the
Requirements of working capital will be very large. For instance, a cotton or sugar
millRequires a large amount of working capital. On the contrary, concerns having large
Investments in fixed assets require less amount of working capital
2. SIZE OF BUSINESS UNIT :
Size of the business unit is also a determining factor in estimating the total
amount of working capital. The general principle in this regard is that the bigger the size
the larger will be the amount of working capital required as because the larger business
units are required to maintain big inventories for the flow of the business.

3. SEASONAL VARIATIONS: -
Strong seasonal movements create certain special problems of working
capital in controlling the internal financial swings. A great many companies have to carry
on seasonal business such as sugar mills, oil mills or woolen mills etc. and therefore they
require large amount of working capital in the season to purchase the raw materials in
large quantities and utilize them throughout the year.

4. TIME CONSUMED IN MANUFACTURE : -

The average time taken in the process of manufacture is also an important
factor in determining the amount of working capital. The longer the period of
manufacture the large the investor required.

5. TURNOVER OF CIRCULATING CAPITAL: -

Turnover means the ratio of annual gross sales to average working assets.
In simple words, it means the speed with which circulating capital completes its rounds
or the number of times the amount invested in working assets has been converted into
cash by sales of the finished goods and reinvested in working assets during a year.

6. LABOR INTENSIVE VS CAPITAL INTENSIVE INDUSTRIES : -

In labor intensive industries, large working capital is required
because or regular payment of heavy wage - bills and more time taken in completing the
manufacturing process. Conversely, the capital intensive industries require lesser
amount of working capital because of the heavy investment in fixed and shorter period
in manufacturing process.

7. NEED TO STOCKPILE RAW MATERIAL AND FINISHED GOODS : -

In industries where it is necessary to stockpile the raw materials
and finished goods increase the amount of working capital lied up in stocks and stores in certain
lines of business where the materials are bulky and best purchasable in large quantities such as
cements stockpiling of raw material is very usual or where labor stoppage is frequent finished
goods stock have to be large in stored quantities.

8. TERMS OF PURCHASE AND SALES:

Terms of purchase and sales also affect the amount of working capital. If a
company purchases all goods in cash and sells its finished product on credit also
naturally it will require large amount of working capital. On the contrary a concern
having credit facilities and allowing no credit to its customers will require lesser amount
of working capital.

9. CONVERSION OF CURRENT ASSETS INTO CASH:

The need of having cash in hand to meet the day to day
requirements payment of wages and salaries rent rates has an important bearing in
deciding the adequate amount of working capital. The greater the cash requirement the
higher will be the need of working capital but if a company has ample stock of liquid
current assets will require lesser amount of working capital because the company can
en cashes such assets immediately in the open market.

10. GROWTH AND EXPANSION OF BUSINESS :

Growing concerns require more working capital than those that are datic.
It is logical to expect larger amount of working capital in a growing concern to meet its
growing needs of funds for its expansion programmers though it varies with economic
condition and corporate practices.
11. BUSINESS CYCLE FLUCTUATIONS :
Business cycle affects the requirement of working capital. At times when the
prices are going up and up and boom conditions prevail the tendency management is to
pile up a big stock of raw materials and to maintain a big stock of finished goods with an
expectation to earn more profits.

12. PROFIT MARGIN AND PROFIT APPROPRIATION :

Some firms enjoy a dominant position in the market due to
quality product or good marketing management or monopoly power in the market and
therefore earn a high profit margin. On the other hand form facing tough competition
eam low margin of profit.

13 PRICE LEVEL CHANGES:

The financial manager should also anticipate the effect of price level
working capital requirements of the firm. Generally, rising price levels will require a
higher amount of working capital because to maintain the same levels changes on
ofCurrent assets will require higher investment. However if companies may revise their
product prices will not face a severe working capital problem. The effects of rising
priceLevels will be different for different firms depending upon their price policies
nature of The product etc.

14. DIVIDEND POLICY:

There is a well established relationship between dividend and working
capital in companies where conservation dividend policy is followed. The changes in
working capital position bring about an adjustment in dividend policy. With a view to
maintain and establishe-d dividend policy is the management before declaring a
dividend gives due consideration to its effects on cash and cash requirements.
3.11 ADEQUACY OF WORKING CAPITAL -
The importance of adequacy of working capital can hardly be over -
emphasized. John L. O. Donnell and Milton S. Gladberg observe" Many a times business
failure takes place due to lack of working capital. Hence, working capital is considered as
the life blood and the controlling nerve center of a business. Inadequate working capital
is business ailment. Therefore, a firm has to maintain a sound working capital. It should
be adequate foe the following reasons:

(1) It protects a business form the adverse effects of shrinkage in the values of
current assets.

(2) It is possible to pay all the current obligations promptly and to take advantage of
cash discounts.

(3) It ensures, to a greater extent, the maintenance of a company's credit standing

and provides for such emergencies as strikes, floods, fires etc.

(4) It permits the carrying of inventories at a level that would enable a business to
serve satisfactorily the needs of its customers.

(5) It enables a company to extend favorable credit terms to its customers.

(6) It enables a company to operate its business more efficiently because delay in
obtaining materials, etc, because of credit difficulties.
(7) Enables a business to withstand periods of depression smoothly.
(8) There may be operating losses or decreased retained
(9) There may be excessive earnings non-operating or extraordinary losses.
(10) The management may fail to obtain funds from other sources for purposes of
expansion.
(11) There may be an unwise dividend policy.
(12) Current funds may be invested in non – current asset
(13) The management may be fail to accumulate funds necessary for meeting non-
current assets. debentures on maturity.
(14) Increasing price may necessitate bigger investments in inventories & fixed assets.

3.12 DETERMINANTS OF WORKING CAPITAL

The need of working capital varies from month to month, year to year. For
determining the working capital needed by a business unit there is no set of rules to
formulate. In order to determine the proper or optimum amount of working capital of A
business unit various factors should be considered carefully as each of them having own
importance and the importance of various factors changes for a business unit overtime.
The main factors that determine the working capital requirements of the organization
are as follows:

1) General nature of business.

2) Size of business operations/scale of operations.
3) Production cycle.
4) Business cycle.
5) Production policy.
6) Credit policy.
(7) Growth and expansion.
8) Vagaries and availability of raw material.
9) Profit level.
10) Terms of purchase and sales.
11) Depreciation policy.

1. GENERAL NATURE OF BUSINESS :

The working capital requirements of an enterprise are basically related to
the conduct of the business. Enterprises fall into some board categories depending on
the nature of their business. For instance, public utilities have certain features which
have a bearing on their working capital needs. The two important features are (1) cash
sales and (2) sale of services rather than commodities.

2. SIZE OF BUSINESS OPERATIONS/SCALE OF OPERATIONS :

The size of business has also an important impact on its
working capital needs. Size of a business unit may be measured in terms of a scale of
operation Bigger the size of business CAMS Journal of Business Studies and Research
ISSN : 097-7953 July-September 10 unit, the larger will be the amount of working capital
required as because the larger business units are required to maintain huge inventories
and also spend more in carrying out the business operations smoothly. A business unit
carrying on activities on a small scale needs less working capital.

3. PRODUCTION CYCLE :
It refers to the time involved in the manufacture of goods. It covers the
time span between the procurement of raw materials and the completion of the
manufacturing process leading to the production of finished goods. Funds have to be
necessarily tied up during the process of manufacture, necessitating enhanced working
capital. The longer the time-span the larger will be the tied-up and therefore the larger
is the working capital needed and vice versa.

4. BUSINESS CYCLE :
The working capital requirements are also determined by the nature of
business cycle. Business fluctuations leads to a cyclical and seasonal changes that, in
turn cause a shift in the working capital position, particularly for temporary working
capital requirements. The variations in business conditions may be in two directions;
Upward phase: When boom conditions prevail, Downswing phase: When economic
activity is marked by a decline. During in the upswing of business activity, the need for
working capital is likely to grow to cover the lag between increased ales and receipt of
cash as well as to finance purchase of additional material to cater to the expansion of
the level of activity.
5. PRODUCTION POLICY :
The quantum of working capital is also determined by the production
policy. The case of certain lines of business, the demand for the product is seasonal. In such a
case there are two options: either they confine their production only to periods when goods are
purchased or they follow a steady production policy throughout the year and produce goods at
a level to meet the peak demand. The former option is inconvenient. The second option would
require a sufficient amount of working capital.

6. CREDIT POLICY: -
The credit policy relating to sales and purchases also affects the working
capital. The credit policy influences the requirements of working capital in two ways.

(1) Through credit items granted by the firm to its customers;

(2) The credit term available to the firm from its creditors.

7. GROWTH AND EXPANSION: -

As a company grows, the working capital requirements will be
more. It is very difficult to determine the relationship between the volume of business
of a company and the increase in its working capital. The composition of working capital
in a growing company also shifts with economic circumstances and corporate practices .
Other things being equal, growing industries require more working capital than those
that are static

8. VAGARIES AND AVAILABILITY OF RAW MATERIAL : -

The availability or otherwise of certain raw materials on a
continuous basis without interruption would sometimes affect the requirement of
working capital. There may be some raw materials which can't be procured easily either
because of their sources are few or they are irregular. To sustain smooth production,
therefore, the firm might be compelled to purchase and stock them far in excess of
genuine production needs. This will result in an CAMS Journal of Business Studies and
Research ISSN: 0975 -7953 July- September 11 excessive inventory of such materials
Hence the volume of working capital to be kept will be increased.
9. PROFIT LEVEL:
The level of profits earned differs from enterprise Higher profit margin
would improve the prospects of generating more internal funds there by contributing to
the working capital pool. The net profit is source of working capital to the extent that it
has been carned in cash..

10. TERMS OF PURCHASE AND SALES: -

Terms of purchase and sales [cash or credit] also affect the amount
of working capital. If a company purchases all goods in cash and sells its finished
products on credit, then the company will require larger amount of working capital. On
the other hand, a company purchasing all goods on credit and allowing no credit to its
customers will require lesser amount of working capital. The length of period of period
credit has also a bearing on working capital..

11. DEPRECIATION POLICY -

The depreciation policy through its effect on tax liability and retained
earnings has an influence on working capital. Depreciation is tax deductible. Higher the
amount of depreciation the lower the tax liability and more the cash profit. Similarly,
the amount of net profits will be less if higher depreciation is charged. If the dividend
policy is linked with net profits, the firm can pay fewer dividends by providing for more
depreciation. Thus, depreciation is an indirect way of retaining profits and preserving
the firm's working capital position.

3.13 STRUCTURE OF CURRENT ASSETS AND CURRENT LIABILITIES

Current Liability Current Assets

Bank Overdraft Cash And Bank Balance

Creditors Inventories : Raw Materials
Work In Progress
Finished Goods

Outstanding Expences Spare Parts

Bills Payable Account Receivables

Short – Term Loans Bills Receivables

Proposed Dividends Accured Income

Provision For Taxation, Etc Prepaid Expences

Short- Term Investments

3.14 RATIO -

RATIO ANALYSIS: -
Ratio analysis is the process of determining and presenting the relationship.

items and group of items in the statements.

According to Batty J. Management Accounting “Ratio can assist management in its

basic functions of forecasting, planning coordination, control and communication".

 Profit Ratio.
 Liquid Ratio.

1) PROFIT RATIO -
This ratio help in determining the efficiency with which affairs of the business are
being managed. An increase in the ratio over the previous period appointment in the
operational efficiency of the business provided the gross profit ratio is amount. The ratio
is thus an effective measure to check the profitability of a business.

Net Profit
Net profit ratio = _____________ * 100

Total Income

2) LIQUID RATIO -
This ratio is also termed as acid test ratio or quick ratio. This ratio is ascertained
by comparing the liquid assets to expencess & stock are not taken as liquid assets.
current liabilities prepaid

Liquid Asset
Liquid Ratio = ____________________ * 100
Current Liabilites

3.15 PERFORMA FOR ESTIMATION OF WORKING CAPITAL REQUIREMENTS

Particulars Rs Rs

Current assets

Goodwill Xxx

Investment Xxx

Debtors Xxx

Bills receivable Xxx

Prepaid expences Xxx

Outstanding income Xxx

Total current assets Xxx

Current liabilities

Creditors Xxx

Bank overdraft Xxx

Bank loan Xxx

Bills payable Xxx

Prepaid income Xxx

Outstanding expences Xxx

Total current liabilities Xxx

Net working capital Xxx

(current assets – current
liabilities)