vijay wc concept

8/8/2019 Vijay Wc Concept

1/26

Top of Form

Search

Bottom of Form

OurSitemap

Home

HRProjectReport

MarketingProjects

FinanceProjects

Project Report - Working Capital Management

WORKING CAPITAL - Meaning of Working Capital

Capital required for a business can be classified under two main categories via,

1) Fixed Capital

2) Working Capital

Every business needs funds for two purposes for its establishment and to carry out

its day- to-day operations. Long terms funds are required to create production facilities

through purchase of fixed assets such as p&m, land, building, furniture, etc.

Investments in these assets represent that part of firms capital which is blocked onpermanent or fixed basis and is called fixed capital. Funds are also needed for short-

term purposes for the purchase of raw material, payment of wages and other day to-

day expenses etc.

These funds are known as working capital. In simple words, working capital

refers to that part of the firms capital which is required for financing short- term or

current assets such as cash, marketable securities, debtors & inventories. Funds, thus,

invested in current assts keep revolving fast and are being constantly converted in to

cash and this cash flows out again in exchange for other current assets. Hence, it is alsoknown as revolving or circulating capital or short term capital.

CONCEPT OF WORKING CAPITAL

There are two concepts of working capital:

1. Gross working capital
http://www.allprojectreports.com/MBA-Projects/Finance-Project-Report/Sitemap.htmhttp://www.allprojectreports.com/MBA-Projects/Finance-Project-Report/Sitemap.htmhttp://www.allprojectreports.com/MBA-Projects/Finance-Project-Report/index.htmhttp://www.allprojectreports.com/MBA-Projects/Finance-Project-Report/HR.htmhttp://www.allprojectreports.com/MBA-Projects/Finance-Project-Report/HR.htmhttp://www.allprojectreports.com/MBA-Projects/Finance-Project-Report/HR.htmhttp://www.allprojectreports.com/MBA-Projects/Finance-Project-Report/Marketing.htmhttp://www.allprojectreports.com/MBA-Projects/Finance-Project-Report/Marketing.htmhttp://www.allprojectreports.com/MBA-Projects/Finance-Project-Report/Marketing.htmhttp://www.allprojectreports.com/MBA-Projects/Finance-Project-Report/Finance.htmhttp://www.allprojectreports.com/MBA-Projects/Finance-Project-Report/Finance.htmhttp://www.allprojectreports.com/MBA-Projects/Finance-Project-Report/Sitemap.htmhttp://www.allprojectreports.com/MBA-Projects/Finance-Project-Report/Sitemap.htmhttp://www.allprojectreports.com/MBA-Projects/Finance-Project-Report/index.htmhttp://www.allprojectreports.com/MBA-Projects/Finance-Project-Report/HR.htmhttp://www.allprojectreports.com/MBA-Projects/Finance-Project-Report/HR.htmhttp://www.allprojectreports.com/MBA-Projects/Finance-Project-Report/HR.htmhttp://www.allprojectreports.com/MBA-Projects/Finance-Project-Report/Marketing.htmhttp://www.allprojectreports.com/MBA-Projects/Finance-Project-Report/Marketing.htmhttp://www.allprojectreports.com/MBA-Projects/Finance-Project-Report/Marketing.htmhttp://www.allprojectreports.com/MBA-Projects/Finance-Project-Report/Finance.htmhttp://www.allprojectreports.com/MBA-Projects/Finance-Project-Report/Finance.htm


2/26

2. Net working capital

The gross working capital is the capital invested in the total current assets

of the enterprises current assets are those

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

CONSTITUENTS OF CURRENT ASSETS

1) Cash in hand and cash at bank

2) Bills receivables

3) Sundry debtors

4) Short term loans and advances.

5) Inventories of stock as:

a. Raw material

b. Work in process

c. Stores and spares

d. Finished goods

6. Temporary investment of surplus funds.

7. Prepaid expenses

8. Accrued incomes.

9. Marketable securities.

In a narrow sense, the term working capital refers to the net working.

Net working capital is the excess of current assets over current

liability, or, say:

NET WORKING CAPITAL = CURRENT ASSETS CURRENT

LIABILITIES.

Net working capital can be positive or negative. When the current

assets exceeds the current liabilities are more than the current assets.

Current liabilities are those liabilities, which are intended to be paid in

the ordinary course of business within a short period of normally one


3/26

accounting year out of the current assts or the income business.

CONSTITUENTS OF CURRENT LIABILITIES

1. Accrued or outstanding expenses.

2. Short term loans, advances and deposits.

3. Dividends payable.

4. Bank overdraft.

5. Provision for taxation , if it does not amt. to app. Of profit.

6. Bills payable.

7. Sundry creditors.

The gross working capital concept is financial or going concern concept whereas net

working capital is an accounting concept of working capital. Both the concepts have

their own merits.

The gross concept is sometimes preferred to the concept of working capital for the

following reasons:

1. It enables the enterprise to provide correct amount of

working capital at correct time.

2. Every management is more interested in total current assets

with which it has to operate then the source from where it ismade available.

3. It take into consideration of the fact every increase in the

funds of the enterprise would increase its working capital.

4. This concept is also useful in determining the rate of return

on investments in working capital. The net working capital

concept, however, is also important for following reasons:

It is qualitative concept, which indicates the firms ability to

meet to its operating expenses and short-term liabilities.

IT indicates the margin of protection available to the short

term creditors.

It is an indicator of the financial soundness of enterprises.

It suggests the need of financing a part of working capital


4/26

requirement out of the permanent sources of funds.

CLASSIFICATION OF WORKING CAPITAL

Working capital may be classified in to ways:

o On the basis of concept.

o On the basis of time.

On the basis of concept working capital can be classified as gross

working capital and net working capital. On the basis of time, working

capital may be classified as:

Permanent or fixed working capital.

Temporary or variable working capital

PERMANENT OR FIXED WORKING CAPITAL

Permanent or fixed working capital is minimum amount which is required to ensure

effective utilization of fixed facilities and for maintaining the circulation of current

assets. Every firm has to maintain a minimum level of raw material, work- in-process,

finished goods and cash balance. This minimum level of current assts is called

permanent or fixed working capital as this part of working is permanently blocked in

current assets. As the business grow the requirements of working capital also increases

due to increase in current assets.

TEMPORARY OR VARIABLE WORKING CAPITAL

Temporary or variable working capital is the amount of working capital which is

required to meet the seasonal demands and some special exigencies. Variable working

capital can further be classified as seasonal working capital and special working

capital. The capital required to meet the seasonal need of the enterprise is called

seasonal working capital. Special working capital is that part of working capital which

is required to meet special exigencies such as launching of extensive marketing forconducting research, etc.

Temporary working capital differs from permanent working capital in the sense that is

required for short periods and cannot be permanently employed gainfully in the

business.

IMPORTANCE OR ADVANTAGE OF ADEQUATE WORKING


5/26

CAPITAL

SOLVENCY OF THE BUSINESS: Adequate working capital

helps in maintaining the solvency of the business by providing

uninterrupted of production. Goodwill: Sufficient amount of working capital enables a firm to

make prompt payments and makes and maintain the goodwill.

Easy loans: Adequate working capital leads to high solvency and

credit standing can arrange loans from banks and other on easy and

favorable terms.

Cash Discounts: Adequate working capital also enables a

concern to avail cash discounts on the purchases and hence reduces cost.

Regular Supply of Raw Material: Sufficient working capital

ensures regular supply of raw material and continuous production.

Regular Payment Of Salaries, Wages And Other Day

TO Day Commitments: It leads to the satisfaction of the

employees and raises the morale of its employees, increases their

efficiency, reduces wastage and costs and enhances production and

profits.

Exploitation Of Favorable Market Conditions: If a

firm is having adequate working capital then it can exploit the favorable

market conditions such as purchasing its requirements in bulk when the

prices are lower and holdings its inventories for higher prices.

Ability To Face Crises: A concern can face the situation during

the depression.

Quick And Regular Return On Investments: Sufficient

working capital enables a concern to pay quick and regular of dividends

to its investors and gains confidence of the investors and can raise more

funds in future.

High Morale: Adequate working capital brings an environment of

securities, confidence, high morale which results in overall efficiency in

a business.

EXCESS OR INADEQUATE WORKING CAPITAL


6/26

Every business concern should have adequate amount of working capital to

run its business operations. It should have neither redundant or excess

working capital nor inadequate nor shortages of working capital. Both

excess as well as short working capital positions are bad for any business.

However, it is the inadequate working capital which is more dangerous

from the point of view of the firm.

DISADVANTAGES OF REDUNDANT OR EXCESSIVE

WORKING CAPITAL

1. Excessive working capital means ideal funds which earn

no profit for the firm and business cannot earn the required

rate of return on its investments.

2. Redundant working capital leads to unnecessarypurchasing and accumulation of inventories.

3. Excessive working capital implies excessive debtors and

defective credit policy which causes higher incidence of

bad debts.

4. It may reduce the overall efficiency of the business.

5. If a firm is having excessive working capital then the

relations with banks and other financial institution may not

be maintained.

6. Due to lower rate of return n investments, the values of

shares may also fall.

7. The redundant working capital gives rise to speculative

transactions

DISADVANTAGES OF INADEQUATE WORKING CAPITAL

Every business needs some amounts of working capital. The need for working capital

arises due to the time gap between production and realization of cash from sales. Thereis an operating cycle involved in sales and realization of cash. There are time gaps in

purchase of raw material and production; production and sales; and realization of cash.

Thus working capital is needed for the following purposes:

For the purpose of raw material, components and spares.

To pay wages and salaries


7/26

To incur day-to-day expenses and overload costs such as office

expenses.

To meet the selling costs as packing, advertising, etc.

To provide credit facilities to the customer.

To maintain the inventories of the raw material, work-in-progress,

stores and spares and finished stock.

For studying the need of working capital in a business, one has to study the

business under varying circumstances such as a new concern requires a lot

of funds to meet its initial requirements such as promotion and formation

etc. These expenses are called preliminary expenses and are capitalized.

The amount needed for working capital depends upon the size of the

company and ambitions of its promoters. Greater the size of the business

unit, generally larger will be the requirements of the working capital.

The requirement of the working capital goes on increasing with the growth

and expensing of the business till it gains maturity. At maturity the amount

of working capital required is called normal working capital.

There are others factors also influence the need of working capital in a

business.

FACTORS DETERMINING THE WORKING CAPITAL

REQUIREMENTS

1. NATURE OF BUSINESS: The requirements of

working is very limited in public utility undertakings such as

electricity, water supply and railways because they offer cash sale

only and supply services not products, and no funds are tied up in

inventories and receivables. On the other hand the trading and

financial firms requires less investment in fixed assets but have to

invest large amt. of working capital along with fixed investments.

2. SIZE OF THE BUSINESS: Greater the size of the

business, greater is the requirement of working capital.

3. PRODUCTION POLICY: If the policy is to keep

production steady by accumulating inventories it will require higher

working capital.


8/26

4. LENTH OF PRDUCTION CYCLE: The longer

the manufacturing time the raw material and other supplies have to

be carried for a longer in the process with progressive increment of

labor and service costs before the final product is obtained. Soworking capital is directly proportional to the length of the

manufacturing process.

5. SEASONALS VARIATIONS: Generally, during

the busy season, a firm requires larger working capital than in slack

season.

6.WORKING CAPITAL CYCLE: The speed with

which the working cycle completes one cycle determines the

requirements of working capital. Longer the cycle larger is the

requirement of working capital.

DEBTORS

CASH FINISHED GOODS

RAW MATERIAL WORK IN PROGRESS

7. RATE OF STOCK TURNOVER: There is an inverse co-

relationship between the question of working capital and the

velocity or speed with which the sales are affected. A firm having a

high rate of stock turnover wuill needs lower amt. of working capital

as compared to a firm having a low rate of turnover.

8. CREDIT POLICY: A concern that purchases its requirements

on credit and sales its product / services on cash requires lesser amt.

of working capital and vice-versa.

9. BUSINESS CYCLE: In period of boom, when the business is

prosperous, there is need for larger amt. of working capital due to

rise in sales, rise in prices, optimistic expansion of business, etc. On

the contrary in time of depression, the business contracts, sales


9/26

decline, difficulties are faced in collection from debtor and the firm

may have a large amt. of working capital.

10. RATE OF GROWTH OF BUSINESS: In faster growing

concern, we shall require large amt. of working capital.11. EARNING CAPACITY AND DIVIDEND POLICY: Some

firms have more earning capacity than other due to quality of their

products, monopoly conditions, etc. Such firms may generate cash

profits from operations and contribute to their working capital. The

dividend policy also affects the requirement of working capital. A

firm maintaining a steady high rate of cash dividend irrespective of

its profits needs working capital than the firm that retains larger part

of its profits and does not pay so high rate of cash dividend.

12. PRICE LEVEL CHANGES: Changes in the price level also

affect the working capital requirements. Generally rise in prices

leads to increase in working capital.

Others FACTORS: These are:

Operating efficiency.

Management ability.

Irregularities of supply.

Import policy.

Asset structure.

Importance of labor.

Banking facilities, etc.

MANAGEMENT OF WORKING CAPITAL

Management of working capital is concerned with the problem thatarises in attempting to manage the current assets, current liabilities. The

basic goal of working capital management is to manage the current

assets and current liabilities of a firm in such a way that a satisfactory

level of working capital is maintained, i.e. it is neither adequate nor

excessive as both the situations are bad for any firm. There should be no


10/26

shortage of funds and also no working capital should be ideal.

WORKING CAPITAL MANAGEMENT POLICES of a firm has a

great on its probability, liquidity and structural health of the

organization. So working capital management is three dimensional in

nature as

1. It concerned with the formulation of policies with regard

to profitability, liquidity and risk.

2. It is concerned with the decision about the composition

and level of current assets.

3. It is concerned with the decision about the composition

and level of current liabilities.

WORKING CAPITAL ANALYSIS

As we know working capital is the life blood and the centre of a

business. Adequate amount of working capital is very much essential

for the smooth running of the business. And the most important part is

the efficient management of working capital in right time. The liquidity

position of the firm is totally effected by the management of working

capital. So, a study of changes in the uses and sources of working

capital is necessary to evaluate the efficiency with which the working

capital is employed in a business. This involves the need of working

capital analysis.

The analysis of working capital can be conducted through a number of

devices, such as:

1. Ratio analysis.

2. Fund flow analysis.

3. Budgeting.

1. RATIO ANALYSIS

A ratio is a simple arithmetical expression one number to another. The

technique of ratio analysis can be employed for measuring short-term


11/26

liquidity or working capital position of a firm. The following ratios can

be calculated for these purposes:

1. Current ratio.

2. Quick ratio

3. Absolute liquid ratio

4. Inventory turnover.

5. Receivables turnover.

6. Payable turnover ratio.

7. Working capital turnover ratio.

8. Working capital leverage

9. Ratio of current liabilities to tangible net worth.

2. FUND FLOW ANALYSIS

Fund flow analysis is a technical device designated to the study the

source from which additional funds were derived and the use to which

these sources were put. The fund flow analysis consists of:

a. Preparing schedule of changes of working capital

b. Statement of sources and application of funds.

It is an effective management tool to study the changes in financial

position (working capital) business enterprise between beginning and

ending of the financial dates.

3. WORKING CAPITAL BUDGET

A budget is a financial and / or quantitative expression of business plans

and polices to be pursued in the future period time. Working capital

budget as a part of the total budge ting process of a business is prepared

estimating future long term and short term working capital needs and

sources to finance them, and then comparing the budgeted figures with


12/26

actual performance for calculating the variances, if any, so that

corrective actions may be taken in future. He objective working capital

budget is to ensure availability of funds as and needed, and to ensure

effective utilization of these resources. The successful implementation

of working capital budget involves the preparing of separate budget for

each element of working capital, such as, cash, inventories and

receivables etc.

ANALYSIS OF SHORT TERM FINANCIAL POSITION

OR TEST OF LIQUIDITY

The short term creditors of a company such as suppliers of goods of

credit and commercial banks short-term loans are primarily interestedto know the ability of a firm to meet its obligations in time. The short

term obligations of a firm can be met in time only when it is having

sufficient liquid assets. So to with the confidence of investors,

creditors, the smooth functioning of the firm and the efficient use of

fixed assets the liquid position of the firm must be strong. But a very

high degree of liquidity of the firm being tied up in current assets.

Therefore, it is important proper balance in regard to the liquidity of

the firm. Two types of ratios can be calculated for measuring short-

term financial position or short-term solvency position of the firm.

1. Liquidity ratios.

2. Current assets movements ratios.

A) LIQUIDITY RATIOS

Liquidity refers to the ability of a firm to meet its current obligations

as and when these become due. The short-term obligations are met by

realizing amounts from current, floating or circulating assts. The

current assets should either be liquid or near about liquidity. These

should be convertible in cash for paying obligations of short-term

nature. The sufficiency or insufficiency of current assets should be

assessed by comparing them with short-term liabilities. If current

assets can pay off the current liabilities then the liquidity position is


13/26

satisfactory. On the other hand, if the current liabilities cannot be met

out of the current assets then the liquidity position is bad. To measure

the liquidity of a firm, the following ratios can be calculated:

1. CURRENT RATIO2. QUICK RATIO

3. ABSOLUTE LIQUID RATIO

1. CURRENT RATIO

Current Ratio, also known as working capital ratio is a measure of

general liquidity and its most widely used to make the analysis of

short-term financial position or liquidity of a firm. It is defined as therelation between current assets and current liabilities. Thus,

CURRENT RATIO = CURRENT ASSETS

CURRENT LIABILITES

The two components of this ratio are:

1) CURRENT ASSETS

2) CURRENT LIABILITES

Current assets include cash, marketable securities, bill receivables,sundry debtors, inventories and work-in-progresses. Current liabilities

include outstanding expenses, bill payable, dividend payable etc.

A relatively high current ratio is an indication that the firm is liquid

and has the ability to pay its current obligations in time. On the hand a

low current ratio represents that the liquidity position of the firm is not

good and the firm shall not be able to pay its current liabilities in time.

A ratio equal or near to the rule of thumb of 2:1 i.e. current assets

double the current liabilities is considered to be satisfactory.

CALCULATION OF CURRENT RATIO

(Rupees in crore)

e.g.


14/26

Year 2006 2007 2008

Current Assets 81.29 83.12 13,6.57

Current Liabilities 27.42 20.58 33.48

Current Ratio 2.96:1 4.03:1 4.08:1

Interpretation:-

As we know that ideal current ratio for any firm is 2:1. If we see the

current ratio of the company for last three years it has increased from

2006 to 2008. The current ratio of company is more than the ideal

ratio. This depicts that companys liquidity position is sound. Its

current assets are more than its current liabilities.2. QUICK RATIO

Quick ratio is a more rigorous test of liquidity than current ratio.

Quick ratio may be defined as the relationship between quick/liquid

assets and current or liquid liabilities. An asset is said to be liquid if it

can be converted into cash with a short period without loss of value. It

measures the firms capacity to pay off current obligations

immediately.

QUICK RATIO = QUICK ASSETS

CURRENT LIABILITES

Where Quick Assets are:

1) Marketable Securities

2) Cash in hand and Cash at bank.

3) Debtors.

A high ratio is an indication that the firm is liquid and has the ability

to meet its current liabilities in time and on the other hand a low quick

ratio represents that the firms liquidity position is not good.

As a rule of thumb ratio of 1:1 is considered satisfactory. It is

generally thought that if quick assets are equal to the current liabilities

then the concern may be able to meet its short-term obligations.

However, a firm having high quick ratio may not have a satisfactory


15/26

liquidity position if it has slow paying debtors. On the other hand, a

firm having a low liquidity position if it has fast moving inventories.

CALCULATION OF QUICK RATIO

e.g. (Rupees in Crore)

Year 2006 2007 2008

Quick Assets 44.14 47.43 61.55


Quick Ratio 1.6 : 1 2.3 : 1 1.8 : 1

Interpretation :

A quick ratio is an indication that the firm is liquid and has the

ability to meet its current liabilities in time. The ideal quick ratio is

1:1. Companys quick ratio is more than ideal ratio. This shows

company has no liquidity problem.

3. ABSOLUTE LIQUID RATIO

Although receivables, debtors and bills receivable are generally more

liquid than inventories, yet there may be doubts regarding their

realization into cash immediately or in time. So absolute liquid ratio

should be calculated together with current ratio and acid test ratio so

as to exclude even receivables from the current assets and find out the

absolute liquid assets. Absolute Liquid Assets includes :

ABSOLUTE LIQUID RATIO = ABSOLUTE LIQUID ASSETS

CURRENT LIABILITES

ABSOLUTE LIQUID ASSETS = CASH & BANK BALANCES.

e.g. (Rupees in Crore)

Year 2006 2007 2008

Absolute Liquid Assets 4.69 1.79 5.06



16/26

Absolute Liquid Ratio .17 : 1 .09 : 1 .15 : 1

Interpretation :

These ratio shows that company carries a small amount of cash.

But there is nothing to be worried about the lack of cash because

company has reserve, borrowing power & long term investment. In

India, firms have credit limits sanctioned from banks and can easily

draw cash.

B) CURRENT ASSETS MOVEMENT RATIOS

Funds are invested in various assets in business to make sales

and earn profits. The efficiency with which assets are managed

directly affects the volume of sales. The better the management of

assets, large is the amount of sales and profits. Current assets

movement ratios measure the efficiency with which a firm manages

its resources. These ratios are called turnover ratios because they

indicate the speed with which assets are converted or turned over into

sales. Depending upon the purpose, a number of turnover ratios can be

calculated. These are :

1. Inventory Turnover Ratio

2. Debtors Turnover Ratio

3. Creditors Turnover Ratio

4. Working Capital Turnover Ratio

The current ratio and quick ratio give misleading results if current assets

include high amount of debtors due to slow credit collections and

moreover if the assets include high amount of slow moving inventories.

As both the ratios ignore the movement of current assets, it is important

to calculate the turnover ratio.

1. INVENTORY TURNOVER OR STOCKTURNOVER RATIO :

Every firm has to maintain a certain amount of inventory of

finished goods so as to meet the requirements of the business.

But the level of inventory should neither be too high nor too

low. Because it is harmful to hold more inventory as some


17/26

amount of capital is blocked in it and some cost is involved in it.

It will therefore be advisable to dispose the inventory as soon as

possible.

INVENTORY TURNOVER RATIO = COST OF GOOD SOLDAVERAGE INVENTORY

Inventory turnover ratio measures the speed with which the

stock is converted into sales. Usually a high inventory ratio

indicates an efficient management of inventory because more

frequently the stocks are sold ; the lesser amount of money is

required to finance the inventory. Where as low inventory

turnover ratio indicates the inefficient management of inventory.

A low inventory turnover implies over investment in inventories,dull business, poor quality of goods, stock accumulations and

slow moving goods and low profits as compared to total

investment.

AVERAGE STOCK = OPENING STOCK + CLOSING STOCK

2

(Rupees in Crore)

Year 2006 2007 2008

Cost of Goods sold 110.6 103.2 96.8

Average Stock 73.59 36.42 55.35

Inventory Turnover Ratio 1.5 times 2.8

times

1.75 times

Interpretation :

These ratio shows how rapidly the inventory is turning into

receivable through sales. In 2007 the company has high inventory

turnover ratio but in 2008 it has reduced to 1.75 times. This shows that

the companys inventory management technique is less efficient as

compare to last year.

2. INVENTORY CONVERSION PERIOD:


18/26

INVENTORY CONVERSION PERIOD = 365 (net working days)

INVENTORY TURNOVER RATIO

e.g.

Year 2006 2007 2008

Days 365 365 365

Inventory Turnover Ratio 1.5 2.8 1.8

Inventory Conversion Period 243 days 130

days

202 days

Interpretation :

Inventory conversion period shows that how many days

inventories takes to convert from raw material to finished goods. In

the company inventory conversion period is decreasing. This shows

the efficiency of management to convert the inventory into cash.

3. DEBTORS TURNOVER RATIO :

A concern may sell its goods on cash as well as on credit to

increase its sales and a liberal credit policy may result in tying up

substantial funds of a firm in the form of trade debtors. Trade debtorsare expected to be converted into cash within a short period and are

included in current assets. So liquidity position of a concern also

depends upon the quality of trade debtors. Two types of ratio can be

calculated to evaluate the quality of debtors.

a) Debtors Turnover Ratio

b) Average Collection Period

DEBTORS TURNOVER RATIO = TOTAL SALES (CREDIT)

AVERAGE DEBTORS

Debtors velocity indicates the number of times the debtors are

turned over during a year. Generally higher the value of debtors

turnover ratio the more efficient is the management of debtors/sales or

more liquid are the debtors. Whereas a low debtors turnover ratio


19/26

indicates poor management of debtors/sales and less liquid debtors.

This ratio should be compared with ratios of other firms doing the

same business and a trend may be found to make a better

interpretation of the ratio.

AVERAGE DEBTORS= OPENING DEBTOR+CLOSING DEBTOR

2

e.g.

Year 2006 2007 2008

Sales 166.0 151.5 169.5

Average Debtors 17.33 18.19 22.50

Debtor Turnover Ratio 9.6 times 8.3

times

7.5 times

Interpretation :

This ratio indicates the speed with which debtors are being

converted or turnover into sales. The higher the values or turnover

into sales. The higher the values of debtors turnover, the moreefficient is the management of credit. But in the company the debtor

turnover ratio is decreasing year to year. This shows that company is

not utilizing its debtors efficiency. Now their credit policy become

liberal as compare to previous year.

4. AVERAGE COLLECTION PERIOD :

Average Collection Period = No. of Working Days

Debtors Turnover Ratio

The average collection period ratio represents the average

number of days for which a firm has to wait before its receivables are

converted into cash. It measures the quality of debtors. Generally,

shorter the average collection period the better is the quality of debtors

as a short collection period implies quick payment by debtors and

vice-versa.


20/26

Average Collection Period = 365 (Net Working Days)

Debtors Turnover Ratio

Year 2006 2007 2008

Days 365 365 365

Debtor Turnover Ratio 9.6 8.3 7.5

Average Collection Period 38 days 44

days

49 days

Interpretation :

The average collection period measures the quality of

debtors and it helps in analyzing the efficiency of collection efforts. It

also helps to analysis the credit policy adopted by company. In the

firm average collection period increasing year to year. It shows that

the firm has Liberal Credit policy. These changes in policy are due to

competitors credit policy.

5. WORKING CAPITAL TURNOVER RATIO :

Working capital turnover ratio indicates the velocity of

utilization of net working capital. This ratio indicates the

number of times the working capital is turned over in the

course of the year. This ratio measures the efficiency with

which the working capital is used by the firm. A higher ratio

indicates efficient utilization of working capital and a low ratio

indicates otherwise. But a very high working capital turnover

is not a good situation for any firm.

Working Capital Turnover Ratio = Cost of Sales

Net Working Capital

Working Capital Turnover = Sales

Networking Capital


21/26

e.g.

Year 2006 2007 2008

Sales 166.0 151.5 169.5

Networking Capital 53.87 62.52 103.09

Working Capital Turnover 3.08 2.4 1.64

Interpretation :

This ratio indicates low much net working capital requires

for sales. In 2008, the reciprocal of this ratio (1/1.64 = .609) shows

that for sales of Rs. 1 the company requires 60 paisa as working

capital. Thus this ratio is helpful to forecast the working capital

requirement on the basis of sale.

INVENTORIES

(Rs. in Crores)

Year 2005-

2006

2006-

2007

2007-2008

Inventories 37.15 35.69 75.01

Interpretation :

Inventories is a major part of current assets. If any company

wants to manage its working capital efficiency, it has to manage its

inventories efficiently. The graph shows that inventory in 2005-2006

is 45%, in 2006-2007 is 43% and in 2007-2008 is 54% of their current

assets. The company should try to reduce the inventory upto 10% or

20% of current assets.

CASH BNAK BALANCE :

(Rs. in Crores)

Year 2005-

2006

2006-

2007

2007-2008


22/26

Cash Bank Balance 4.69 1.79 5.05

Interpretation :

Cash is basic input or component of working capital. Cash is

needed to keep the business running on a continuous basis. So the

organization should have sufficient cash to meet various requirements.

The above graph is indicate that in 2006 the cash is 4.69 crores but in

2007 it has decrease to 1.79. The result of that it disturb the firms

manufacturing operations. In 2008, it is increased upto approx. 5.1%

cash balance. So in 2008, the company has no problem for meeting its

requirement as compare to 2007.

DEBTORS :

(Rs. in Crores)

Year 2005-

2006

2006-

2007

2007-2008

Debtors 17.33 19.05 25.94

Interpretation :

Debtors constitute a substantial portion of total current assets. In

India it constitute one third of current assets. The above graph is

depict that there is increase in debtors. It represents an extension of

credit to customers. The reason for increasing credit is competition

and company liberal credit policy.

CURRENT ASSETS :

(Rs. in Crores)

Year 2005-2006

2006-2007

2007-2008

Current Assets 81.29 83.15 136.57

Interpretation :

This graph shows that there is 64% increase in current assets in


23/26

2008. This increase is arise because there is approx. 50% increase in

inventories. Increase in current assets shows the liquidity soundness of

company.

CURRENT LIABILITY :

(Rs. in Crores)

Year 2005-

2006

2006-

2007

2007-2008

Current Liability 27.42 20.58 33.48

Interpretation :

Current liabilities shows company short term debts pay to

outsiders. In 2008 the current liabilities of the company increased. But

still increase in current assets are more than its current liabilities.

NET WOKRING CAPITAL :

(Rs. in Crores)

Year 2005-

2006

2006-

2007

2007-2008

Net Working Capital 53.87 62.53 103.09

Interpretation :

Working capital is required to finance day to day operations of a

firm. There should be an optimum level of working capital. It should

not be too less or not too excess. In the company there is increase in

working capital. The increase in working capital arises because the

company has expanded its business.

RESEARCH METHODOLOGY

The methodology, I have adopted for my study is the various tools, which basically

analyze critically financial position of to the organization:


24/26

I. COMMON-SIZE P/L A/C II. COMMON-SIZE BALANCE SHEET

III. COMPARTIVE P/L A/C

IV. COMPARTIVE BALANCE SHEET

V. TREND ANALYSIS

VI. RATIO ANALYSIS

The above parameters are used for critical analysis of financial position. With theevaluation of each component, the financial position from different angles is tried to bepresented in well and systematic manner. By critical analysis with the help of differenttools, it becomes clear how the financial manager handles the finance matters inprofitable manner in the critical challenging atmosphere, the recommendation are made

which would suggest the organization in formulation of a healthy and strong positionfinancially with proper management system.

I sincerely hope, through the evaluation of various percentage, ratios andcomparative analysis, the organization would be able to conquer its in efficienciesand makes the desired changes.

ANALYSIS OF FINANCIAL STATEMENTS

FINANCIAL STATEMENTS:

Financial statement is a collection of data organized according to logical and consistentaccounting procedure to convey an under-standing of some financial aspects of abusiness firm. It may show position at a moment in time, as in the case of balance sheetor may reveal a series of activities over a given period of time, as in the case of anincome statement. Thus, the term financial statements generally refers to the twostatements

(1) The position statement or Balance sheet.

(2) The income statement or the profit and loss Account.

OBJECTIVES OF FINANCIAL STATEMENTS:

According to accounting Principal Board of America (APB) states

The following objectives of financial statements: -1. To provide reliable financial information about economic resources and obligationof a business firm.

2. To provide other needed information about charges in such economic resources andobligation.

3. To provide reliable information about change in net resources (recourses lessobligations) missing out of business activities.


25/26

4. To provide financial information that assets in estimating the learning potential ofthe business.

LIMITATIONS OF FINANCIAL STATEMENTS:

Though financial statements are relevant and useful for a concern, still they do not

present a final picture a final picture of a concern. The utility of these statements isdependent upon a number of factors. The analysis and interpretation of thesestatements must be done carefully otherwise misleading conclusion may be drawn.

Financial statements suffer from the following limitations: -

1. Financial statements do not given a final picture of the concern. The data given inthese statements is only approximate. The actual value can only be determined whenthe business is sold or liquidated.

2. Financial statements have been prepared for different accounting periods, generallyone year, during the life of a concern. The costs and incomes are apportioned todifferent periods with a view to determine profits etc. The allocation of expenses andincome depends upon the personal judgment of the accountant. The existence of

contingent assets and liabilities also make the statements imprecise. So financialstatement are at the most interim reports rather than the final picture of the firm.

3. The financial statements are expressed in monetary value, so they appear to givefinal and accurate position. The value of fixed assets in the balance sheet neitherrepresent the value for which fixed assets can be sold nor the amount which will berequired to replace these assets. The balance sheet is prepared on the presumption of agoing concern. The concern is expected to continue in future. So fixed assets are shownat cost less accumulated deprecation. Moreover, there are certain assets in the balancesheet which will realize nothing at the time of liquidation but they are shown in thebalance sheets.

4. The financial statements are prepared on the basis of historical costs Or originalcosts. The value of assets decreases with the passage of time current price changes arenot taken into account. The statement are not prepared with the keeping in view theeconomic conditions. the balance sheet loses the significance of being an index ofcurrent economics realities. Similarly, the profitability shown by the income statementsmay be represent the earning capacity of the concern.

5. There are certain factors which have a bearing on the financial position andoperating result of the business but they do not become a part of these statementsbecause they cannot be measured in monetary terms. The basic limitation of thetraditional financial statements comprising the balance sheet, profit & loss A/c is thatthey do not give all the information regarding the financial operation of the firm.Nevertheless, they provide some extremely useful information to the extent the balancesheet mirrors the financial position on a particular data in lines of the structure ofassets, liabilities etc. and the profit & loss A/c shows the result of operation during acertain period in terms revenue obtained and cost incurred during the year. Thus, thefinancial position and operation of the firm.

FINANCIAL STATEMENT ANALYSIS


26/26

It is the process of identifying the financial strength and weakness of a firm from theavailable accounting data and financial statements. The analysis is done

CALCULATIONS OF RATIOS

Ratios are relationship expressed in mathematical terms between figures, which are

connected with each other in some manner.

CLASSIFICATION OF RATIOS

Ratios can be classified in to different categories depending upon the basis of

classification

The traditional classification has been on the basis of the financial statement to which

the determination of ratios belongs.

These are:-

Profit & Loss account ratios

Balance Sheet ratios

Composite ratios

Project Description :

Title : Working Capital Management of ____________

Pages : 73

Category : Project Report for MBA

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

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

Website Developed by : Connecting World Team(Private Policy)
mailto:[email protected]:[email protected]

vijay wc concept

Documents