A STUDY ON WORKING CAPTIAL MANAGEMENT

With Special Reference to Ka!i"h therapetic! P#t Lt$

Chennai

%Y
M& TAMI'()ANAN
REG NO *+,,-./++/*
O0
PANIMALAR ENGINEERING COLLEGE
A PRO1ECT REPORT
S23itte$ to the
0ACULTY O0 MANAGEMENT STUDIES
In partial flfill3ent of the re4ire3ent!
0or the a5ar$ of the $e6ree
Of
MASTER O0 %USINESS ADMINISTRATION
ANNA UNI)ERSITY7 C(ENNAI .,, ,*8
NO)EM%ER *,,9
1


DEPARTMENT O0 MANAGEMENT STUDIES

%ONA0IDE CERTI0ICATE
This is to certify that, this project report titled A STUDY ON WORKING CAPTIAL
MANAGEMENT: is a bonafide work of Mr&M&TAMI'()ANAN Re6 No *+,,-./++/* who carried
out the research in my supervision. Certified further, that to the best of my knowledge the work reported
here in does not form part of any other project report or dissertation on the basis of which a degree or award
was conferred on earlier occasion on this or any other candidate.

;;;;;;;;;;;;;;;;;;;; (ea$ of the Depart3ent
Si6natre of the Gi$e

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Si6natre of the Internal
E<a3iner

Place7 ;;;;;;;;;;;;;;;;;;;;


Date7 ;;;;;;;;;;;;;;;;;;;;





2
DECLARATION

.T!"#$%!&!& 'Re6$& No&*+,,-./++/*= pursuing (! )rogramme in )!&"!*!+
,&-"&,,+"&- C.**,-, of Chennai hereby declare that the )roject work entitled A St$> On
WORKING CAPTIAL MANAGEMENT?& /ith 0pecial +eference To 1ausikh Therapeutics )vt ltd,
Chennai. 0ubmitted to !nna 2niversity, Chennai in partial fulfillment of the re3uirements for the award of
the degree of aster of (usiness !dministration is a bonafide work done by me under the guidance of r.
T3t& Mr!& Anra$ha M&%&A&@ *ecturer of )animalar engineering college. To the best of my knowledge,
the work reported there in does not form part of any other thesis or work on the basis of which a degree or
award was conferred on an earlier occasion.




)lace4 5555555555555555555555
0ignature of the +esearcher
6ate4










7
ACKNOWLEDGEMENT

"t is my pleasure and gratitude to present this copy of my project entitled A St$> on Wor"in6 Capital
Mana6e3ent8.

" wish to e9press my thanks to our founder and chairman Dr.1EPPIAR M&A@ %&L@ Ph&D&@ )animalar
engineering college, Chennai for giving me this opportunity to undergo the course of aster of (usiness
!dministration and an opportunity to undertake this project work.

" wish to e9press my sincere gratitude to our honorable Correspondent,
Mr&P&C(INNADURAI@ M&A&@ Ph&D&@ pani3alar en6ineerin6 colle6e for giving me an opportunity to
undergo the course of aster of (usiness !dministration and an opportunity to undertake this project
work.

" wish to e9press my thanks to our )rincipal Mr&S&RA1APANDIAN, )animalar engineering
College Chennai.
" wish to e9press my thanks to our 6irector C&SAKT(IKUMAR@ M&E&@ an$ M&Phil )animalar
engineering college, Chennai.

" wish to e9press my thanks to our head of the department Dr& )&MALAKS(MI M&L&@ M&%&A&@
Ph&D,)animalar engineering college, Chennai
" wish to e9press my thanks to my guide T3t& Mr!& Anra$ha M&%&A&@ )animalar engineering
college.
" take opportunity to thank Mr& P& )EERA RAGA)AN , :inance anager, in 1ausikh
Therapeutics pvt ltd., Chennai, for granting me permission to do my project work. " also thank the
+espondents who have helped me to carry out my project successfully.

" would be failing in my duty if " do not thank my parents and my dear friends for their continuous
encouragement and support to complete my project success.
;
CONTENTS
C(APTER SU%1ECT PAGE NO&
I INTRODUCTION O0 TOPIC .
II COMPANY PRO0ILE +,
III %ASIC CONCEPTS O0
WORKING CAPITAL
+A
I) IDENTI0ICATION AND
STATEMENT O0 T(E
PRO%LEM
A,
) (YPOT(ESES A+
)I RESEARC( AND O%1ECTI)ES A*
)II RESEARC( DESIGN A/
)III ANALYSIS AND
INTERPRETATION O0 DATA
AA
IB 0INDINGS AC
B SUGGESTIONS 8,
BI CONCLUSION 8+
BII %I%LIOGRAP(Y 8*
<

I& INTRODUCTION
/orking capital management is an important decision making area of
financial management of an enterprise. The concept of working capital is used in two
ways. -ross working capital refers to the firm=s investment in current assets. &et working
capital means the difference between current assets and current liabilities, and therefore,
represents that position of current assets, which the firm has to finance either from long
term funds or bank borrowings.
! firm is re3uired to invest in current assets for smooth, uninterrupted
production and sale. :irm=s investment in current assets will depend on its operating
cycle. .perating cycle is defined as the time duration, which the firm re3uires to
manufacture and sell the product and collect cash. The manufacturing cycle that is
conversion of raw materials into work>in>progress into finished goods is a component of
operating cycle. anufacturing cycle depends upon the firm=s choice of technology and
production policy. The firm=s credit policy is another factor, which influences the
working capital re3uirement. "t depends on the nature and norms of business, competition
and the firm=s desire to use it as a marketing tool. The re3uirement for working capital
finance will be reduced to the e9tent the firm is able to e9ploit the credit e9tended by
suppliers. 6epending on the possible availability of working capital finance and its own
profitability, a firm may carry more or less investment in current assets than warranted by
technical factors.
?
The firm=s decision about the level of investment in current assets involves a
trade>off between risk and return. /hen the firm invests more in current assets it reduces
the risk of illi3uidity but loses in the terms of profitability. The firm therefore is re3uired
to strike a right balance.
The financing of current assets also involves a trade>off between risk and
return. ! firm can choose from short or long term source of finance. "f the firm uses more
of short>term funds for financing both current and fi9ed assets, its financing policy is
considered aggressive and risky. "ts financing policy will be considered conservative if it
makes relatively more use in financing its assets. ! balanced approach is to finance
=permanent= current assets by long>term sources and =temporary= current assets by short>
term source of finance. Theoretically, short>term debt is considered to be risky and costly
to finance permanent current assets.
@
OPERATING CYCLE C(ART
CAS(
SALES RAWMATERIALS
WARE(OUSE WORKINPROGRESS
0INIS(ED GOODS
.perating Cycle is the time duration re3uired to convert sales after the conversion of
resources into inventories into cash. "f the duration of operating cycle is long then the
investment in working capital is also more.
A
The duration of operating cycle is long time particularly the duration time between the
movement of goods from warehouse to sales is very long. Pre!ent !tat! of 5or"in6
capital in KAUSIK( T(ERAPEUTICS DP= LTD Lt$&
Crrent ,/E,A ,AE,8 ,8E,. ,.E,- ,-E,9
"nventory
1BA<A.??
1BBB;.?C 1B<<1.B1 A?2B.<? 121<<.1A
0undry 6ebtors ABC@.?2 C7CC.CB 122AA.?B 17;;?.71
2B<12.BC
Cash and (ank 2B<@.<C 2BB<.A< 2B2B.2< 27CC.12 2CB2.;;
(alances.
-ross /C 21B17.A@ 21;1B.;; 2;A<C.A? 2;;?<.CC 7<<?C.@1
DLESS=
Crrent
Lia2ilitie! 17<C<.?; 11;A<.2@ 12B<B.?7 11A1C.?B
1A2?C.C1
&et /C @;1A.@7 CC2<.1@ 12ABC.27 12?;?.7C
1@2CC.AB
C
The present study on current !sset anagement of 1!20"1$ T$,+!),2T"C0
')D *T6 *imited will help them to manage working capital in such a way to ma9imiEe
profitability of the firm without impairing its li3uidity.
!bout as
1ausikh Therapeutics was incorporated in 2BBA, as a privately held medium scale
company engaged in manufacture of pharmaceutical formulations for the global market.
.ur state of the art plant, which conforms to stringent c-) guidelines facilitates
production of a wide range of advanced and finished dosage forms. /e have laid thrust
on contract research and customer oriented manufacturing system. /e offer formulations
in various languages F third party name ' neutral code D as per client specifications.
ission
.ur Chief concern at 1ausikh Therapeutics is for peopleGs health. "n accordance
with the most demanding international 3uality standards, we produce technologically
demanding and environment friendly products. /ith our knowledge and e9pertise we
help to create a better and happier life.
.ur aim is to make the utmost use of our resources to be the ideal partner for
pharmaceutical companies, as they seek to optimiEe and e9pand their business operations.
!ctivites
.ur development activities have been directed towards our own trademark
protected drugs which are noted for their efficiency, high 3uality and safety and
affordable price.Throughout the years the production of drugs for human use has been
1ausikhGs central activity. .ur range provides products for the treatment of
Cardiovascular, "nfectious, -astrointestinal, &europsychiatric, +heumatic, %iral and
other disorders. These drugs are produced in diverse pharmaceutical forms ranging from
tablets, coated tablets and capsules to granules, syrups and dry syrups. This enables the
doctor to prescribe the most suitable form to the individual patient.
1B
%itamins and minerals are biologically active organic compounds essential for the
growth ,development and general health of everyone. /hen the body re3uires more
vitamins and minerals than can be obtained from food alone, it is advisable to take
vitamin preparations, vitamin>mineral or mineral products.
*2H.%"T, ":,+T"&, ,&,+C!* are just some of the more successful vitamin>mineral
products.
In#e!t3ent
!t 1ausikh we constantly follow the innovations in the global pharmaceutical industry
and swiftly adapt our activities to meet the changing market demands. /e have been
setting aside one si9th of our turnover for investments, for we are well aware that it is
only with moderniEed production and 3uality technology that we can keep pace with
world trends in the pharmaceutical domain, while with our investments in the
environment, we can ensure that the wok goes on in pleasant surroundings and that we
remain an agreeable neighbour to those around us.
.ur most precious investments remain those in knowledge. "t is for this very reason that
we, at 1ausikh are prepared for the challenges.
)eople
/e recogniEe that an important part of achieving our objective is dependant on our
"ntellectual capital and the motivation of our staff. /e encourage a proactive team culture
and take steps to keep everyone abreast of the latest in technology, operating
management system through staff training and concrete opportunity of advancements.
-ood open interpersonal relations with the staff, business partners, customers and
the people around us I this is what enables us to combine our business success with our
humane mission. /e know how to listen to creative incentives and competitive
challenges , and we respond to them with delight.
+ight from the very start we at 1ausikh have been building up close relations
with our customers, business partners , employees and other groups in the environment in
which we are involved . "t is indeed our staff who through their e9pertise skill and
3ualifications, help to give the company its vital competitive edge and so its success. /e
are constantly planning for the engagement of new employees , preliminary and in>
11
service training, while at the same time encouraging the personal and professional
development of all 1ausikhGs staff members.
/e work unstintingly to give you satisfaction because your trust in us demands
no less. "t is our aim to ensure you will never have a momentGs doubt that you chose the
best possible people to make life healthier.
+esource
.ur state of the art plant, which conforms to stringent c-) guidelines facilitates
production of a wide range of advanced and finished dosage forms. /e have laid thrust
on contract research and customer oriented manufacturing system. /e offer formulations
in various languages F third party name ' neutral code D as per client specifications. .ur
resources include.
:ully functional and well e3uipped manufacturing facilities for production of
T!(*,T0F C!)02*,0F 6+J 0J+2)0
K ,9pertise in manufacturing formulations in all major dosages coatedF
uncoated tablets, capsules and dry syrups
K .ver 1BBBB s3uare feet of production area
K !n e9clusive customer service department headed by 6irector of ,9ports
for catering to our overseas clients
K ,9cellent penetrative distribution network across "ndia and ,9clusive
representation in various countries
K ,9tensive e9perience and e9pertise in e9ports to major countries
K %igilant and highly sophisticated 3uality control department
Luality policy
12
!t 1ausikh we have adopted the philosophy of total 3uality management. /e guarantee
the production of efficacious , high 3uality, safe and environment friendly products
manufactured in conformity with international standards and with the customerGs
e9pectations.
The 3uality system is based on the rules and guidelines of the current -ood
anufacturing )ractices' -)D under the /$. norms. The production of
pharmaceutical products is carried out in accordance with the -) standards which
apply to the pharmaceutical industry.
)roducts
.ur range provides products for the treatment of Cardiovascular, "nfectious,
-astrointestinal, &europsychiatric, +heumatic, %iral and other disorders. These drugs are
produced in diverse pharmaceutical forms ranging from tablets, coated tablets and
capsules to granules, syrups and dry syrups. This enables the doctor to prescribe the most
suitable form to the individual patient.
NonE!teroi$al AntiEinfla33ator> $r6!
Anticol$@ Antialler6ic@ Antihi!ta3ine!
Antaci$! F Antilcer!
Anti$ia2etic $r6!
Car$io#a!clar $r6!
)a!ocon!trictor an$ Mi6raine
Antie3etic!
Antip!>chotic $r6!
Anti$epre!!ant!@ (>pnotic!
Anticon#l!ant!
)ita3in!@ Mineral! an$ Calci3 !pple3ent!
Antia3oe2ic!
Ga!trointe!tinal an$ Urinar> tract infection!
Antit2erclo!i!
Anti3alarial
17
Antifn6al!
Anti#iral!
Anti2iotic!
III& %ASIC CONCEPTS O0 WORKING CAPITAL
There are two components of working capital>gross working capital
and &et working capital.
Current assets which can be converted into cash within an accounting
year and include cash, short term securities, debtors, bills receivables and inventories.
/orking capital is the e9cess of current assets over current liabilities.
Current liabilities are those claims of out standing which are e9pected to mature for
payment within accounting year and include creditors, bills payable, bank overdraft
and outstanding e9penses.
&et working capital may be negative or positive according to current
assets e9ceed current liabilities or current liabilities e9ceed current assets respectively.

The arguments advanced in favour of the view that working captial
and current assets are interchangeable terms are4
1. )rofits are earned with the help of assets which are partly fi9ed and partly
current. To certain e9tent, similarity can be observed in fi9ed and current
assets so far as both are partly borrowed and yield profit over and above the
interest cost. :i9ed assets constitute the fi9ed capital of a company. *ogically
current assets should mean working capital of the company
.
1;
2. This definition takes into account the fact that with every increase in
borrowings the working capital will increase, while according to net concept
of working capital there will be no change.
7. The management is more concerned with the total current assets as they
constitute the total funds available for operating purpose than with the sources
from where the funds come.
;. The concept of gross working capital is a financial concept and is 3uantitative.
Those who favour that working capital represents. Current assets minus
current liabilities argue that4
- *ong usage sanctions this definition of working capital.
- This concept of working capital helps the inventors and the creditors
of a company to judge its financial soundness and margin of
protection. "t is possible because with an increase in short>term
borrowing the working capital does not increase. "t will be enhanced
only by plouging back of profits or sale or conversion of fi9ed assets
into li3uid assets by raising funds from the new shareholders. The
surplus of current assets'C!D over current liabilities'C*D can always
be relied upon to meet contingencies since the enterprise is under no
obligation to return this amount.
The concept of net working capital is an accounting concept and is 3ualitive.
The gross working capital concept focuses attention on two aspects of current
assets.
aD .ptimum investment in current assets and
1<
bD :inancing of current assets.
The investment in current assets should be just ade3uate to
the needs of the company. These may be fluctuating with changing
business activities causing e9cess of shortage or working capital
fre3uently. The management should only be too prompt to initiate
an action and correct the inbalances. !nother aspect of the gross
working capital points to the need of arranging funds to finance
current assets. The finance management should have a knowledge
of the sources of working capital funds as well as the investment
avenues where the idle funds may be temporarily invested.
.n the other hand, the net working capital concept indicates.
aD The li3uidity position of the company and
bD 0uggests the e9tent to which working capital needs may be
financed by permanent sources of funds.
"n order to protect their interests, the short>term creditors always like a
company to maintain current assets at a high level than current liabilities. "t is a
conventional rule to maintain the level of current assets twice of the level of
current liabilities. $owever the 3uality of current assets should be considered
indetermining the level of current assets %ia>a>vis current liabilities. ! weak
li3uidity position possess a threat to the solvency of the company and makes it
unsale and unsound. ,9cessive li3uidity is also bad because funds will be idle or
1?
under utilised. Therefore, prompt and timely action should be taken by
management to improve and correct the imbalances in the li3uidity position of the
firm.
The networking capital concept also covers the 3uestion of judicious
mi9 of long>term and short>term funds for financing current assets. :or any
company, there is a minimum amount of net working capital which is permanent.
Therefore, a portion of the working capital should be financed with the permanent
sources of funds such as owner=s capital, debentures, long>term debts, preference
capital or retained earnings. The management must therefore, decide the e9tent to
which current assets should be financed with e3uity capital andFor borrowed
capital.
Cla!!ification of Wor"in6 Capital
The permanent working capital is that part of the capital which is
permanently locked up in the circulation of current assets and in keeping it
moving. "t can again be sub>divided into 'aD +egular working capital and
'bD +eserve margin working capital. +egular working capital is the minimum
amount of li3uid capital needed to keep up the circulation of capital from cash to
inventories to receivables and back again to cash. +eserve margin working capital
is the e9cess over the need for regular working capital that should be provided for
contingencies such as rising prices, business depressions, strikes, fires,
une9pected severe competition and special operations such as e9periments with
products or with method of distribution, contracts to supply new business and the
like which can be undertaken only if sufficient funds are available and which in
many cases mean the survival of a business.
The variable working capital changes with the volume of business.
"t may be sub>divided into 'aD seasonal and 'bD special working capital. The
capital re3uired to meet the seasonal needs of industry is termed as seasonal
working capital on the other hand, special working capital is that part of the
1@
variable working capital which is re3uired for financing special operations, such
as the inaguration of e9tensive marketing empaigns and carrying out special jobs
and similar other operations that are outside the usual business of buying,
fabricating and selling.
I3portance of Wor"in6 Capital
!de3uacy of working capital is the life blood and controlling nerve
center of business. !lthough current liabilities are paid from funds generated by
current assets, the working capital should be sufficient in relation to current
liabilities to afford a margin of safety. The principle advantages of having a
sufficient amount of working capital may be ennumerated as below4
- Creates a feeling of security and confidence.
- "s a must for maintaining solvency and continuing production.
- Creates and maintains sound goodwill.
- Cash discounting are easily availed.
- 0teady work for the employees and efficiency in production.
- ,asy loans from the banks.
- )eriods of slump can be easily over come.
- :acility of off season purchasing.
1A
- Luick and steady return to the investors.
- -eneral rise in management morale.
!ccording to -erstenberg M&othing succeeds like success and nothing
gives the appearance to success as readily as the ability to meet
promptly and without efforts a reasonable demand for cash payments.
$owever, it is not the effect on others so much as the effect on the
managers themselves, that is importantN the felling of security, the
sense of power. These promote the selfconfidence which pay
chologists so fre3uently tells us is an element of success.
The $i!a$#anta6e! of re$n$ant Wor"in6 Capital are
- &o proper return on investments.
- "t may lead to unnecessary purchasing.
- *arge working capital is the converse of low current debt.
- ,9cess working capital destroys the control of turnover ratio
commonly used in conducting an efficient business.
- :all in the eyes of the banks.
0actor! Affectin6 WC Re4ire3ent!
1C
Though no definite formula can be advocated for determining the
/C re3uirements of a business, careful consideration of the following
factors aid is determining the proper amount of /.C.4
- &ature and volume of business.
)ublic utility services such as +ailways re3uire a lesser amount of /C but
more fi9ed assets. .n the otherhand, trading or merchandising institutions
need larger /C. 0imilarly basic and key industries engaged in the
management of producer goods have less production of /C to fi9ed
capital than industries producing consumer goods.
- 0iEe of business units.
- Time consumed in manufacturing.
- &eed to stockpile raw>materials.
- &eed consumed between order and delivery.
- Turnover of circulating capital 4 "t is the ratio of annual gross sales to
arrange working assets.
- Terms and conditions of purchase and sale.
- 0easonal and special meets of the business.
- Conversion of current assets into cash.
- (usiness oscillation and /C.
- Change in Technology.
Co3po!ition of Wor"in6 Capital
2B
The total current assets consisting of inventories, sundry debtors, cash and
bank balances alone with the loans and advances is termed as the gross working capital.
&etworking capital is the balance of this over the current liabilities including provisions,
if any.
E!ti3atin6 the Wor"in6 Capital Re4ire3ent!
M/orking Capital is the blood of the businessM &o business can be successfully
run without an ade3uate amount of working capital. To avoid the shortage of working
capital at once, an estimate of working capital re3uirements should be made in advance
so that arrangements an be made to procure ade3uate working capital. (ut estimation of
working capital re3uirements is not an easy task and large number of factors to be
considered for this estimation. :or a manufacturing organiEation, the following factors
have to be taken into consideration while making an estimation of working capital
re3uirement.
1. Total cost increased on material, wages and overheads.
2. Total length of time for which raw materials are to remain in stores before
they are issued for production.
7. The length of the production cycle or work>in>progress i.e., the time taken
for conversion of raw material into finished goods.
;. The length of sales cycle during which finished goods are to be kept
waiting for sale.
<. The average period of credit allowed to customers.
?. The amount of cash re3uired to pay day>to>day e9penses of the business.
@. The average amount of cash re3uired to make advance payments, if any.
21
A. The average period e9pected to be allowed by suppliers.
C. Time lag in the payment of wages and other e9penses.
In#entor> 3ana6e3ent
"nventories constitute the most significant part of current assets of a large majority
of companies in "ndia. .n an average, inventories are appro9imately ?B percent of
current assets in public limited companies in "ndia. (ecause of the large siEe of
inventories maintained by firms, a considerable amount of funds is re3uired to be
committed to them. "t is, therefore, absolutely imperative to manage inventories
efficiently and effectively in order to avoid unnecessary investment. ! firm neglecting
the management of inventories will be jeopardising its long>run profitability and many
fail ultimately.
"nventories are stock of the product company is manufacturing for sale and
components that make up the product. The various forms in which inventories e9ist in a
manufacturing company are 4 raw materials, work in pricess and furnished goods.
- +aw materials are those basic inputs that are converted into finished
product through the manufacturing process. +aw materials inventories
are those units which have been purchased and stored for future
productions.
- /ork in process inventories are semi>manufactured products. They
represent products that need more work before they become finished
products for sale.
22
- :inished goods inventories are those completely manufactured
products which are ready for sale. 0tocks of raw materials and work>
in>process facilitate production, while stock of finished goods is
re3uired for smooth marketing operations, "nventories serves as a link
between the production and consumption of goods
There are three general motives for holding inventories.
'aD Tran!action! 3oti#e emphasises the need to maintain inventories to
facilitate smooth production and sales operations.
'bD Precationar> 3oti#e necessitates holding of inventories to guard against
the risk of unpredictable changes in demand and supply forces and other
factors.
'cD Speclati#e 3oti#e! influences the decision to increase or reduce
inventory levels to take advantage of price fluctations.
! company should maintain ade3uate stock of materials for a continuous
supply to factory for an uninterrupted production. "t is not possible for a company
to procure raw materials. /henever it is needed. ! time lag e9ists between
demand for materials an its supply. !lso, there e9ists uncertainity in procuring
raw materials, in time on many occassions. The procurement of materials may be
delayed because of such factors as strike, transport disruption or short supply.
Therefore the firm should maintain sufficient stock of raw materials at a given
time streamline production.
The firm should always avoid a situation of over investment or under
investment in inventories. The major dangers of over investment are4
'aD 2nnecessary tie>up of the firm=s funds and loss of profit.
27
'bD ,9cessive carring costs and
'cD +isk of li3uidity.
The e9cessive level of inventories consumers cost. The carrying costs,
such as the costs of storage, handling, insurance, recording and inspection, also
increase in proportion to the volume of inventory. These costs will impair the
firms profitability further.
aintaining an inade3uate level of inventories is also dangerous. The
conse3uences of under investment in inventories are 'aD )roduction hold>ups and
'bD failure to meet delivery commitments. This will result in fre3uent production
interuption.
The aim of inventory management is to avoid e9cessive and inade3uate
levels of inventories and to maintain sufficient inventory for the smooth
production and sales operations. !n effective inventory management should
- ensure a continuous supply of raw materials to facilitate uninterupted
production.
- maintain sufficient stock of raw materials in periods of short supply
and anticipate price changes.
- maintain sufficient finished goods inventory for smooth sales
operations and efficient customer services.
- minimiEe the carrying cost and time and
2;
- control investment in inventories and keep it an optimum level.
Accont! Recei#a2le! Mana6e3ent
Trade credit is the most prominent force of the modern business. "t is
considered as an essential marketing tool, acting as a bridge for movement of
goods through production and distribution stages to customers finally. ! company
grants trade credit to protect its sales from the competitors and to attract the
potential customers to buy its products at favourable terms. /hen the company
sells its products or services and does not receive cash for it immediately, the
company is said to have granted trade credit to customers. Trade credit, thus,
creates receivable or book debts, which the company is e9pected to collect in near
future. The book debt or receivable arising out of create has three characteristics.
0ir!tl>, it involves an element of risk which should be carefully analysed.
Cash sales are totally riskless, but not the credit sales, as the cash payment
has yet to be received.
Secon$l>, it is based on economic value. To the buyer, the economic
value in goods or services passes immediately at he time of sale, while the
seller e9pects an e3uivalent value to be received later on.
Thir$l>, it implies futurity. The cash payment for goods or services
received by the buyer will be made by him in a future period. The
customers from whom receivables or book debts have to be collected in
future are called trade debtors or simply as debtors and represent the
company=s claim or asset.
2<
+eceivables or book debts constitute a substantial portion of
current assets of several companies. -ranting credit and creating debtors
amount to the blocking of the company=s funds. This necessitates the
company to get funds from banks or other sources. Thus, trade debtors
represent investment. !s substantial amounts are tied>up in trade debtors
or receivables, it needs careful analysis and proper management.
A& Cre$it Ter3!
The stipulations under which the company sells on credit to its customers
are called credit terms. The two important components of credit terms are4
'aD the credit period and 'bD the cash discount terms.
'aD Cre$it perio$ 7 The time duration for which credit is e9tended to the
customers is referred to as credit period. "t is generally stated in terms of
the net date. 2sually the credit period of the company is governed by the
industry norms, but company=s can e9tend credit for longer duration to
stimulate sales. "f the company=s bad>debts build>up, it may tighteen up its
credit policy as against the industry norms.
'bD Ca!h $i!cont! 7 Cash discount is another aspect of credit terms. any
companies offer to grant cash discount to their customers in order to
induce them to pay their bills early. The cash discount terms indicate the
rate of discount and the period for which discount has been offered. "f a
customer does not avail this offer, he is e9pected to make the payment by
the net date.
2?
"n fact, the credit terms reflect the combination both credit period
and cash discounts. The complete credit terms indicate 4 'aD the rate of
cash discount, 'bD the discount period and 'cD the credit period.
Credit terms can be used as an investment to push sales. The most
desirable credit terms, which increase the overall profitability of the
company, should be offered to customers. The :inancial anager should
compare costs and benefits of alternate credit terms to find out the most
desirable credit terms. $owever, the reaction of competitors must be taken
care of while determining the company=s credit terms. "f the competitors
rela9 their credit policies with a rela9ation in the company=s credit policy,
the company=s sales many not increase as anticipated and thus, credit
rela9ation may even result in a loss to the company.
%& Cre$it Stan$ar$
The credit standard by the company has an impact on sales and
receivables. The sales and receivables levels are likely to be high, if the
credit standards of the company are relatively loose. "n contrast, if the
company has relatively tight credit standards, the sales and receivables
levels are e9pected to be relatively low. The company=s credit standards
are influenced by Mthree C=s of credit 4
'aD Character > the willingness of the customer to pay
'bD Capacity > the ability of the customer to pay, and
'cD Conditions > the prevailing economic conditions.
2@
&ormally, a company should lower its credit standards to the
e9tent profitability of increased sales e9ceeds the associated costs. The
costs arising due to credit standard rela9ation are administrative costs of
supervising additional accounts and servicing increase volume of
receivables, bad debt losses, production and selling costs and the cost
resulting from a slower average collection period. /hen the credit
standards are rela9ed, the collection period will be lengthened incase of
the new customers. This may tempt the e9isting customers not to pay bills
in time. The e9tent to which credit standards can be liberaliEed should
depend upon the matching between the profits arising due to increased
sales and the costs to be incurred on the increased sales.
C& Collection polic>
! collection policy is needed because all customers do not pay the
company=s bills in time. There are certain customers who are slow>payers
and some are non>payers. Therefore, the collection policy should aim at
accelerating collection from slow>payers and reducing bad debt losses.
"n order to collect the slow paying accounts, the company should
follow collection procedures in a clear>cut>se3uence. :or e9ample, when
the normal credit period granted to the customer is over and he has not
made the payment, a polite letter reminding the customer that the account
is over>due should be sent. "f the receivables still remain uncollected,
letters that the progressively strong>worded are sent. This may be followed
by telephone, telegram or the company=s representative=s personal visit. "f
the payment is still not made, the company may proceed to legal action.
(efore taking the legal action, the financial condition of the customer is
very weak, legal action against him may simply help to cause his
bankruptcy. This would mark the chances of getting any payment from the
2A
customer. 2nder such a situation, it is better to be patient or accept
reduced payment in settlement of account.
The company has to be very cautions in taking the steps in order to
collect from the slow>paying customer. "f the company is strict in its
collection policy with the permanent customers, who are temporarily
slow>payers due to the economic conditions, they get offended and may
shift to competitors. The company may lose its permanent business. .n
the contrary, if the firm is lenient in collection, receivables could increase
and profitability could reduce. "n following an optimum collection policy,
the company should compare the costs and benefits. The optimum policy
will be ma9imiEe the profitability and will be consistent with the objective
of ma9imiEing the value of the company.
Operatin6 C>cle
There is a difference between current and fi9ed assets in terms of their
li3uidity. ! firm re3uired many years to recover the initial investment in fi9ed
assets such s plant and machinery or land buildings on the contrary, invetment
currrent assets is turned over many times in a year. "nvestments in current assets
such as inventories and book debts is realised during the firms operating cycle
which is usually less than a year.
/hat is an operating cycleO
.perating cycle is the time duration re3uired to convert sales, after the
conversion of resources in to inventories, into cash.
The operating cycle of a manufacturing company involves 7 phases.
2C
- !c3uisition of resources such as raw material, labours, power and fuel
etc
.
- aintenance of the product which includes conversion of raw
materials into work>progress into finished goods.
- 0ales of the product either for cash or on credit. Credit sales created
book debts for collection.
These phases affect cash flows, which most of the time are neither
synchronised nor certain. They are not synchronised because sales and
collections, which give rise to cash inflows, are difficult to forecast carefully.
Cash out flows, on the other hand, are relatively certain. The firm is therefore
re3uired to invest in current assets for a smooth, uninterupted functioning. it needs
to maintain li3uidity to purchase raw material and pay e9pended such as wages
and salaries, otehr manufacturing, administrative and selling e9penses and ta9es
as there is hardly a matching between cash inflows and outflows. Cash is also
help to meet any future e9igencies. 0tock of raw materials and work>in>progress
are kept to ensure smooth production and to guard against non>availability of raw
materials and other components. The firm helds stock of finished goods to meet
the demand of customers on consinous basis and sudden demand from some
customers book debts are created because goods are sold on credit for marketing
and competitive reasons. Thus, a firm makes ade3uate investment in inventories
and book debt for a smooth and uninterrupted production and sales.
The length of the operating cycle is the sum of 4
'iD inventory conversion period.
'iiD (ookdebts conversion period.
7B
Prcha!e Collection
+C) P /")C) P :-C)
"nventory conversion period +eceivable conversion period
payables &et .perating Cycle
-ross .perating Cycle
.perating Cycle of anufacturing firm
Crrent A!!et!
The term working capital refers to the -ross working capital and represents the
amount of funds invested in current assets. Current assets are these assets which in the
ordinary course of business, can be converted into cash within a short period of normally
one accounting year.
The 3aGor con!titte! of Crrent A!!et! are 7
a& In#entorie!
"nventories include raw materials, work>in>progress and finished goods.
2& Sn$r> De2tor!
There are the persons who are owing to the company.
c& Prepai$ E<pen!e!
Those e9penses which have been paid in advance i.e., whose benefit will be
available in future are called prepaid e9penses.
The other Co3ponent! of Crrent A!!et!7
71
$& Ca!h F %an" 2alance!&
e& ShortEter3 loan! an$ a$#ance$&
f& Accre$ inco3e&
Crrent Lia2ilitie!
Current liabilities are those liabilities which are intended to be paid in the
ordinary course of business with in a short period of normally one accounting year.
The Con!titent! of Crrent Lia2ilitie! are7
a& 0undry Creditors.
2& !ccounts )ayable.
c& 0hort term borrowings.
$& 6ividends payable.
e& (ank .verdraft.
0inancin6 of Wor"in6 Capital
/orking capital is mainly financed from long>term finances, short term financing
and spontaneous financing.
- Lon6 ter3 financin6 7 The sources of long>term financing include
ordinary share capital, preference share capital, debenture, long>term
72
borrowings from financial institutions and reserves and
surplus'retained earningsD.
- ShortEter3 financin6 7 The short>term financing is obtained for a
period less than one year. "t is advance from banks and other suppliers
of short>term finance in the money market. 0hort>term finances
include working capital funds from banks, public deposits, commercial
papers, factoring or receivable etc.
- Spontaneo! financin6 7 0pontaneous financing refers to the
automatic sources of short>term funds. The major sources of such
financing are trade credit'creditors and bills payablesD and outstanding
e9penses. There are cost free and therefore, any company would like
to finance its current assets with spontaneous sources as much as
possible.
There are three approache! in thi!& The> are 7
+& Matchin6 approach&
*& Con!er#ati#e approach&
/& A66re!!i#e approach&
+& Matchin6 Approach 7
The company can adopt a financial plan which involves the matching of
the e9pected life of assets with the e9pected life of the source of funds to
finance the assets. The justification for the e9act matching is that since the
purpose of financing is to pay for assets, the financing should be
relin3uished. /hen the asset is e9pected to be relin3uished. Thus, when
the company follows the matching'or hedgingD. !pproach, long>term
financing will be used to finance fi9ed assets and permanent current assets
and short term financing to finance temporary or variable current assets.
77
*& Con!er#ati#e Approach 7
!n e9act matching plan may not be followed in practice. ! company may
adopt a conservative approach in financing its current and fi9ed assets. 2nder this
plan, the company sets with long>term financing. This periods when the company
has no temporary current assets, it stores li3uidity by investing surplus funds into
marketable securities. The conservative plan relies heavily on long term financing
and therefore is less risky.
/& A66re!!i#e Approach 7
! company may be aggressive in financing its assets when it uses
more short>term financing than warranted by the matching plan. 2nder
this plan, the company financed a part of its permanent current assets with
short>term financing.
The decision of the company to use more short>term finance is
guided by the risk>return trade>off. 0hort term financing may be preferred
over long term financing for two reasons4
'iD The cost advantage and
'iiD :le9ibility but it is more risky than long>term financing.
The rate of interest is related to the maturity of debt and the
relationship is called the term structure of interest rates.
-enerally upward sloping is called the yield curve. The
justification for the fact that long term financing costs more can be found
in the li3uidity preference theory which says that more can be found in the
li3uidity reference theory which says that most lenders prefer to make
7;
short>term loan as the risk generally increased with length of lending time.
The only way to induce lendered to give long>term loans is to offer them
higher rates of interest. :le9ibility>wise, short>term loans are easy to
refund when the need for them finished. .n the other hand, the short>term
financing is more risky particularly when they are employed to finance
payment current assets. The choice between long>term and short term
financing thus involves a trade off between risk and return.
0INANCING O0 WORKING CAPITAL %Y %ANKS
(anks in "ndia have been providing finance to industry and trade on the
basis of security. To ensure its e3uitable distribution in the right channels bank credit has
been a subject>matter of regulation and control by the government. !s early 1C?A,
&ational Credit Council constituted a committee under the chairmanship of
0hire. %.T. 6ehejia. 0ince then, two more committees, Tandon Committee and Chore
Committee, have also been constituted on the same subject. Their findings and
recommendations in brief have been discussed below.
DeheGia Co33ittee Report
&ational Credit Council constituted a Committee under Chairmanship of
0hire. %.T. 6eheija in 1C?A to =determine the e9tent to which credit needs of industry and
trade are likely to be inflated and how such trends could be checked= and to go into
establishing some norms could be checked and to go into establishing some norms for
leading operations by commercial banks. The committee was of the opinion that there
was tendency on the part of the industry to avail short>term credit from banks in e9cess of
legitimate re3uirements and that there was also a tendency to divert short>term credit for
long>term assets. !lthough the committee was of the opinion that it was difficult to
7<
evolve norms for lending to industrial concerns, the committee recommended that the
banks should finance industry on the basis of a study basis alone.
The Committee further recommended that the total cash credit
re3uirements of the borrowers should be segregated into =$ard Core= and =0hort>term=
component. The =$ard Core= component which would represent the minimum level of
inventories which the industry was re3uired to hold for maintaining a given level of
production should be put on a formal term loan basis and subject to repayment schedule.
The committee was also of the opinion that generally a customer should be re3uired to
confine his dealings to one bank only.
Ton$on Co33ittee Report
+eserve (ank of "ndia set up a committee under chairmanship of 0hire
).*.Tandon in Quly, 1C@;. The terms of reference of the committee were.
'1D To suggest guidelines for commercial banks to follow>up and
supervise credit from the point of view of ensuring proper end>use
of funds and keeping a watch on the safety of advances.
'2D To suggest type of operational data and other information that may
be obtained by banks periodically from the borrowers and by the
+eserve (ank of "ndia from the leading banks.
'7D To make suggestions for prescribing inventory norms for the
different industries, both in the private and public sectors and
indicate the broad criteria for deviating from these norms.
';D To make recommendations regarding resources for financing the
minimum working capital re3uirements.
7?
'<D To suggest criteria regarding satisfactory capital structure and
sound financial basis in relation to borrowings.
'?D To make recommendations as to whether the e9isting pattern of
financing working capital re3uirements by cash creditFoverdraft
systems etc., re3uires to be modified, if so, suggest suitable
modifications.
The committee was of the opinion that 4
'1D (ank credit is e9tended on the amount of security available and not
according to the level of the operations of the customer.
'2D (ank credit instead of being taken a supplementary to other
sources of finance is treated as the first source of finance.
!lthough the committee recommended the continuation of the e9isting cash credit
system, it suggested certain modifications so as to control the bank finance. The banks
should get the information regarding the operational plans of the customer in advance as
to carry a realistic appraisal of such plans and the banks should also know the end>use of
bank credit so that the finance are used only for purposes for which they are lent.
The recommendations of the committee regarding lending norms have been
suggested under three alternatives. !ccording to the first method the borrower will have
to contribute a minimum of 2<R of the working capital gap form long>term funds i.e.,
owned funds and term borrowingsN this give a minimum current ration of 1.@141. 2nder
the second method the borrower will have to provide a minimum of 2<R of the total
current assets from long>term funds this will give a minimum current ratio of 1.7741. "n
the third method, the borrowers contribution from long>term funds will be to the e9tent of
7@
the entire core current assets and a minimum of 2<R of the balance current assets, thus
strengthening the current ratio further.
The Chore Co33ittee
1. The advantages of e9isting system of e9tending credit by a combination of
the three types of lending viE., cash credit, loan and bill should be
detained. !t the same time it is necessary to give some directional changes
to ensure that wherever possible the use of cash credit would be
supplemented by loans and bills. "t would also be necessary to introduce
necessary corrective measures to remove the impediments in the use of
bill system of finance and also to remove the drawbacks observed in the
cash credit system.
2. (ifurcation of cash credit limit into a demand loan portion and a fluctating
cash credit component has not found acceptance either on the part of the
banks or the borrowers. 0uch bifurcation may not serve the purpose of
better credit planning by narrowing the gap between sanctioned limits and
the e9tent of utiliEation thereof. "t is not likely to be voluntarily accepted
and it does not confer enough advantages to make it compulsory.
7. The need for reducing the over dependence of the medium and large
borrowers both in private and public sectors and banks finance for their
productionFtrading purpose is recogniEed. The net surplus cash generator
of an established industrial unit should be utiliEed partly at least for
reducing borrowing for working capital purpose.
;. "n order to ensure that the borrowers do enhance their contributions to
working capital and to improve their current ration. "t is necessary to place
them under the second method of lending recommended by the Tandon
Committee which would give a minimum current ratio of 147741. !s many
7A
of the borrowers may not be immediately in a position to work under the
second method of lending the e9cess borrowers should be segregated and
treated as a working capital term loan which should be made repayable in
installments. To induce the borrowers to repay this loan, it should be
charged a higher rate of interest. :or the present the group recommends
that the relative cash credit limits. This procedure should be made
compulsory for all borrowers having aggregate working capital limits of
+s.1B *akhs and over.
<. /hile assessing the credit re3uirements, the bank should appraise and fi9
separate limit for the =normal non>peak level= as also the =peak level= credit
re3uirements indicating also the periods during which the separate limits
would be e9tended to all borrower having working capital limit of +s.1B
*akhs and above one of the important criteria for deciding such limits
should be the borrower=s utiliEation of credit limits in the past.
?. "n any adhoc or temporary accommodation is re3uired in e9cess of the
sanctioned limit to meet unforeseen contingencies the additional finance
should be given, where necessary, through a separate demands loan
account on a separate =non>operable= cash credit account. There stiff
penalty for such demand or =non>operable= cash credit portion at least two
percent above the normal rate unless +eserve (ank e9cepts such penalty.
This discipline may be made applicable in cases involving working capital
limits of +s.1B *akhs and above.
@. The borrower should be asked to give his 3uarterly re3uirement of funds
before the commencement of the 3uarter on the basic of his budget, the
actual re3uirement being with in the sanctioned limit for the particular
peak levelFnon>peak level periods. 6rawings less than or in e9cess of the
operative limit so fi9ed'with a tolerance of 1BR either wayD but not
e9ceeding sanctioned limit would be subject to penalty to be fi9ed by the
7C
+eserve (ank from time to time. :or the time being, the penalty may be
fi9ed at 2R p.a. The borrower would be re3uired tosubmit budged
re3uirements in troukucate and a copy each would be sent immediately by
the branch to the controlling office and $ead .ffice for record. The
penalty would be applicable only in repeat of parties enjoying credit limit
of +as.1B lakhs and above, subject to certain e9emptions.
A. The non>submission of the returns in time is partly due to certain features
in t forms themselves. To get over the difficulty, simplified forms have
been proposed. !s the 3uarterly information system is part and part of the
revised style of lending under the cash credit system, if the borrower does
not submit the return with in the prescribed time, he should be penaliEed
by charging the whole outstandings in the account at a penal rate of
interest, 1R p.a. more than the contracted rate for the advance from the
due date of the return till the date of its actual submission.
I)& IDENTI0ICATION O0 PRO%LEMS
+& The duration of operating cycle is very longtime.
*& /arehousing problems.
/& $olds of inventory at a higher stage.
A& Company incurs heavy e9penditure towards Collection of dues from the dealers.
;B
8& Company incurs heavy e9penditure towards inward fright charges.
STATEMENT O0 T(E PRO%LEMS
+& 6uration of operating cycle is long the usage of the /orking Capital also long.
*& "n 1!20"1$ T$,+!),2T"C0 have /arehouse in *udhiana in case of $ero
have /arehouse in very near thatGs why $ero is the arker *eader.
/& $olding the "nventory in very *ong stage the company have a chance to get the
loss.
A& Company will bear all the Collection Charges. The Collection ,9penses not
e9ceed the 1BR of total debtors. "f ,9ceeds 1BR is not favorable for the company.
8& Company incurs heavy e9penditure for inward fright charges because the
Company purchases most of its raw materials from *udhiana. To carry goods
from *udhiana to !mabattur it has incur inward freight charges. :or local
suppliers are not bear the inward freight charges.
IN)ENTORY TURNO)ER
The "nventory turnover shows how rapidly the inventory is turning into receivables
through sales. ! low inventory turnover implies e9cessive inventory levels than warranted
by production and sales activities or a slow>moving or obsolete inventory.
;1
In#entor>
In#entor> Trno#er H EEEEEEEEEEEEEEEEEEEEEEE
Sale!

RESEARC( AND O%1ECTI)ES
The essence of this study is to find out the various factors that affect working
capital re3uirement of the company. This chapter IRe!earch an$ O2Gecti#e!I deals with
the objectives of the study and the effectiveness of the working capital was known by
referring past five years Trading 0tatement from financial year 2BB7>B; to 2BB@>2BBA and
!nnual +eports also.
O%1ECTI)ES
To find out the components of working capital.
To find out the duration of operating cycle.
To check whether manufacturing firms faces problems of slow turnover of inventories
and receivables.
To analyEe whether the company has taken proper care towards credit management
policies and techni3ues.
To e9amine the effect of collection procedure.
To appraise the efficiency and effectiveness of cash flow statement.
;2
To identify whether the surplus cash has been properly invested.
To study whether proper care has been taken to dispose the M.bsolete itemsM and the
inventory that has started deteriorating in 3uality.
To analyEe the working capital management of the company for specified period of <
years.
RESEARC( DESIGN
+esearch the company=s information into two ways. These are )rimary 6ata and
0econdary 6ata.
Pri3ar> Data
" have been collected the )rimary 6ata through financial 6epartment of
the 1!20"1$ T$,+!),2T"C0 ')D *T6 and throw the )ersonal "nterview in the
Company.
Secon$ar> Data
" have been collected the 0econdary 6ata through *ast :ive Jears i.e.,
2BB7>B; to 2BB@>2BBA )rofit and *oss and (alance 0heet also.
Li3itation of St$>
;7
+& 0eagnate growth it becomes difficult for the firm to undertake profitable project for
non>availability of working capital firms.
*& "t becomes difficult to implement operating plant and achieve the firm profit target.
/& .perating in efficiency creed valid becomes difficult even to meet day to day
commitment.
A& :i9ed asset are not efficiency utiliEe the lack of working capital fund.
ANALYSIS AND INTERPRETATION O0 DATA
!nalysis of 6ata from the 1!20"1$ T$,+!),2T"C0 "ndia to collect
the last five years profit and loss, (alance sheet and Cash flow statement also.
Techni4e! DTool! of Metho$!= of anal>!i! an$ interpretation
"nventory Turnover +atio.
+eceivables Turnover +atio.
/orking Capital Turnover +atio.
Current +atio.
"nventory to /orking Capital.

;;
Di= In#entor Trno#er Ratio
The "nventory turnover shows how rapidly the inventory is turning into
receivables through sales. ! low inventory turnover implies e9cessive inventory levels
than warranted by production and sales activities or a slow>moving or obsolete inventory.

In#entor>
In#entor> H EEEEEEEEEEEEEE
Sale!
YEARS *,,/E,A *,,AE,8 *,,8E,. *,,.E,- *,,-E*,,9
In#entor> +,989&.. +,,,.A&.C +,88+&,+ 9.*,&8. +*+88&+9
Sale! .,+.-&+8 .,,,8&A* .,-C/&+, .-/,/&,+ C.8CC&.9
Ratio ,&+9J +&.-J ,&+-J ,&+/J ,&+*J
Dii= Recei#a2le! Trno#er
+eceivables turnover indicates the number of times debtor=s turnover each
year. ! low receivable turnover implies inefficiency of the company in the management
of credit.
Sale!
Recei#a2le! Trno#er H EEEEEEEEEEEEE
De2tor!
YEARS *,,/E,A *,,AE,8 *,,8E,. *,,.E,- *,,-E*,,9
Sale! .,+.-&+8 .,,,8&A* .,-C/&+, .-/,/&,+ C.8CC&.9
De2tor! 9,C-&.* C/CC&C, +**99&., +/AA.&/+ *,8+*&,C
Ratio -&A/J .&/9J A&C8J 8&,,J A&-,J
;<
Diii= Wor"in6 Capital Trno#er Ratio
/orking Capital is the day>to>day usage of the company. .nce the .perating
Cycle rate increases the working capital rate also increase. 0o, the .perating Cycle and
/orking Capital is always keep in e3ual. This way the company maintains a good profit.
Sale!
Wor"in6 Capital Trno#er H EEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEE
Net Wor"in6 Capital DNWC=
YEARS *,,/E,A *,,AE,8 *,,8E,. *,,.E,- *,,-E*,,9
Sale! .,+.-&+8 .,,,8&A* .,-C/&+, .-/,/&,+ C.8CC&.9
Net WC -A+9&-/ CC*8&+- +*9,C&*/ +*.A.&/C +-*CC&9,
Ratio 9&+J .&,8J A&-8J 8&/*J 8&89J
;?
INVENTORY AND RECEIVABLES
TURNOVER
0.00%
2.00%
4.00%
6.00%
8.00%
2003-04 2004-05 2005-06 2006-07 2007-08
Series1 Series2
"n the Jear 2BB7>B; to 2BB;>B< usage of the working capital is reduced again in
the Jear 2BB?>B@ and 2BB@>2BBA working capital usage is increased. 0o, the company
keep to reduce the operation cycle usage automatically the working capital usage also
reduces.
Di#= CURRENT RATIO
Current assets include cash and those assets, which can be converted into cash
within a year, such as marketable securities, debtors, prepaid e9penses and inventories.
Current liabilities include creditors, bills payable, accrued e9penses, short term bank
loan, income ta9 liability and long term debt maturing in current year.
;@
WORKING CAPITAL TURNOVER
RATIO
0.00%
5.00%
10.00%
1
YEARS
R
A
T
I
O
2003-04
2004-05
2005-06
2006-07
2007-08
CURRENT RATIO
0.00%
1.00%
2.00%
3.00%
2
0
0
3
-
0
4
2
0
0
4
-
0
5
2
0
0
5
-
0
6
2
0
0
6
-
0
7
2
0
0
7
-
0
8
YEARS
R
A
T
I
O
Series1
Crrent A!!et! DCA=
Crrent Ratio H EEEEEEEEEEEEEEEEEEEEEEEE
Crrent Lia2ilitie! DCL=
YEARS *,,/E,A *,,AE,8 *,,8E,. *,,.E,- *,,-E*,,9
CA *+,+/&9- *+A+,&AA *A98C&9. *AA.8&CC /88.C&-+
CL +/8C8&.A ++A98&*- +*,8,&./ ++9+C&., +9*.C&C+
Ratio +&88J +&9.J *&,.J *&,-J +&C8J
D#= IN)ENTORY TO WORKING CAPITAL
"nventories constitute the most significant part of current assets. The
manufacturing companies hold inventories in the form of raw materials, work>in>progress
and finished goods. "nventories are significant elements in cost process. (ecause of the
large siEe of inventories is maintained by firms, a considerable amount of funds is
re3uired to the committed to them. "t is thereforeN absolutely imperative to manage
inventories efficiently and effectively.
;A
PERSENTAGE OF INVENTORY TO
WORKING CAPITAL
51.67%
46.73%
42.44%
35.23%
34.17%
2003-04 2004-05 2005-06 2006-07 2007-08
The Company holdGs "nventory at a higher percentage during the year 2BB7>B;
and it has been gradually reducing. "f the firm invests more in inventories the major
dangers are unnecessary tie>up of the companyGs funds and loss of profit, physical
deterioration of inventories.
0INDINGS
The duration of operating cycle is longtime and being a manufacturing firm it faces
problem of slow turnover of inventories. Therefore, the re3uirement of working capital is
more.
The amount of working capital re3uired has been properly determined.
The company follows a suitable discount policy on credit management and the collection
techni3ues followed by it is also good but the e9penses spend by the company for the
collection of dues is not satisfactory.
6ealer=s deposit collected by the company is very low.
The firm incurs heavy inward freight charges. The company maintains e9tra cash reserve.
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SUGGESTIONS
The duration of time between the movement of goods from
warehouse to sales is very longtime which has to be reduced to achieve
efficiency.
The collection e9penses incurred by the company are very high
which has to be reduced.
6ealer deposit collected by the company is very low which will
not have any hold on the dealers when huge amount stands as
outstanding from them.
The suppliers are located in &orth "ndia so the company incurs
heavy e9penditure towards freight charges. 0teps have to be taken to
avoid this additional burden.
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CONCLUSION
! Company is re3uired to carry ade3uate amount of working capital so as to carry on the
productive and distribution activities smoothly. The assets have to be maintained at
appropriate level because both e9cessFshortage of working capital is not good for the
company.
1!20"1$ T$,+!),2T"C0 ')D *T6 has sound technical support. "t will
overcome the situation to become a market leader.
0ince very large variety of models are introduced year after definite growth is
possible.
!fter the complete implementation of the manufacturing redesign program there
will be tremendous change in manufacturing and economic growth.
To achieve the above all good functions, integration between management and
workmen is essential.
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%I%LIOGRAP(Y
+& I&M&Pan$e> D+CCC= :inancial anagement.
*& )an (orne@ 1a3e! C& D8
th
E$n= :inancial anagement and policy, prentice $all
of "ndia.
/& Trading 0tatement of 1!20"1$ T$,+!),2T"C0 ')D *T6 *td.
A& !nnual +eports of Tube "nvestment of "ndia.
8& A&ROOPA D*,,,= 0chool of anagement, !nnamalai 2niversity.
.& WWW&GOOGLE&COM
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