CHAPTER 1

WORKING CAPITAL

INTRODUCTION
Every business whether big, medium or small, needs finance to carry on its operations
and to achieve its target. In fact, finance is so indispensable today that its rightly said to be the
lifeblood of an enterprise. Without adequate finance, no enterprise can possibly accomplish its
objectives. So this chapter deals with studying various aspects of working capital management
that is necessary to carry out the day-to-day operations. The term working capital refers to that
part of firm’s capital which is required for financing short term or current assets such as cash,
marketable securities, debtors and inventories funds invested in current assets 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 known as revolving or circulating capital. On the whole, Working
Capital Management performs a key function and is of top priority for every finance manager.
All managers must, however, keep in mind that n their pursuit to liquidity, they should not lose
sight of there basic goal of profitability. They should be able to attain a judicious mix of liquidity
and profitability while managing their working capital.

Working capital management deals with the most dynamic fields in finance, which needs
constant interaction between finance and other functional managers. The finance manager acting
alone cannot improve the working capital situation. In recent times a few case studies regarding
P;management of working capital in selected companies have been in order to make in-depth
analysis of the several experts of working capital management, The finding of such studies not
only throws new lights on the technical loopholes of management activities of the concerned
companies, but also helps the scholars and researchers to develop new ideas techniques and
methods for effective management of working capital.

Decisions relating to working capital and short term financing are referred to as working
capital management. These involve managing the relationship between a firm's short-term assets
and its short-term liabilities. The goal of working capital management is to ensure that the firm is
able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-
term debt and upcoming operational e
 OPERATING CYCLE

The operating cycle is the average period of time required for a business to make an
initial outlay of cash to produce goods, sell the goods, and receive cash from customers in
exchange for the goods. If a company is a reseller, then the operating cycle does not include any
time for production - it is simply the date from the initial cash outlay to the date of cash receipt
from the customer.

The operating cycle is useful for estimating the amount of working capital that a
company will need in order to maintain or grow its business. A company with an extremely short
operating cycle requires less cash to maintain its operations, and so can still grow while selling at
relatively small margins. Conversely, a business may have fat margins and yet still require
additional financing to grow at even a modest pace, if its operating cycle is unusually long.

In case of a manufacturing company, the operating cycle is the length of time necessary
to complete the following cycle of events –

 Conversion of cash into raw materials

 Conversion of raw materials into work-in-progress
 Conversion of work-in-progress into finished goods
 Conversion of finished goods into accounts receivables
 Conversion of accounts receivable into cash

The above operating cycle is repeated again and again over the period depending upon the nature
of the business and type of product etc. the duration of the operating cycle for the purpose of
estimating working capital is equal to the sum of duration allowed by the suppliers.
OPERATING CYCLE OF MANUFACTURING BUSINESS

Realization Sales

Accounts Receivable

Cash Finished Goods

Purchases Production

Production

Raw Materials Work-in-progress

 CONCEPT OF WORKING CAPITAL

Concept of Working
Capital

Gross Working Capital Net Working Capital

The concept of working capital includes current assets and current liabilities both. There
are two of working capital they are gross and net working capital.

1. Gross working capital: Gross working capital refers to the firm’s investment in current
assets. Current assets are the assets, which can be converted into cash within an accounting year
or operating cycle. It includes cash, short term securities debtors (account receivables or book
debts), bills receivables and stock (inventory).

2. Net working capital: Net working capital refers to the difference between current assets and
liabilities are those claims of outsiders, which are expected to mature for payment within an
accounting year. It includes creditor’s or accounts payables bills payable and outstanding
expenses. Net working copulate can be positive or negative. A positive working capital will arise
when current assets exceed current liabilities and vice versa.
 OBJECTIVES

The overall financial management objectives of an organization could be summarized in terms of

the following five objectives:
 To ensure that the organization always has enough cash to meet its legal obligations and
avoid illiquidity- that is, to maintain adequate short-term financial flexibility.
 To arrange to obtain whatever funds are required from external sources at the right time,
in the right form, and on the best possible terms.
 To ensure that the organization’s assets and liabilities – current and long-term, financial
and operating are utilized as effectively as possible.
 To forecast and plan for the financial requirements of future operations.
 To make all decisions and recommendations on the basis of one primary criterion:
maximizing the long-term value of the organization. This objective is attained in a
publicly owned corporation through maximization of the wealth of the owners
(stockholders) by maximizing stock
 WORKING CAPITAL ANALYSIS

CURRENT ASSETS:
Current assets are those which can be converted into cash as and when needed, i.e., those
assets which can turn to cash as per the requirement of the business within the accounting period.

SUNDRY DEBTORS
Debtors are those to who products are supplied on credit basis. These amounts are
collected within the accounting period. Therefore, they are converted into cash as per
requirement, hence they are considered under current assets.

INVENTORIES
Closing stocks or inventory includes raw materials, work in progress and finished goods,
which are needed for the smooth running of the organization. Generally inventory is maintained
by every organization, which is bound to meet its demand in the market. The amount of
inventory maintained by the firm represents its profitability position. The quality must not be in
excess or inadequate, it must be according to the requirement. The quality stores must be able to
meet the market demand.

CASH AND BANK

Every organization or firm maintains cash reserves in their accounts. This is the major
key on which working of the entire organization is dependent upon. This is required in every
aspect of production, marketing, financing etc. In other words, it can be said that it plays a vital
role in the functioning of any organization.

LOANS AND ADVANCES

Advances to staff are those advances, which are given to the employees as festival
advances. These advances are treated as current assets as they are given advance to the
employees and are collected with in the accounting year. It doesn’t result in any default payment
as the amount is deducted from their salaries directly during their payment. Their advances are
prepared and are collected in the accounting year. These are the loans and advances amount that
are given by the organization in procuring of raw materials. Amount is given in advance to its
supplier in supplying the raw materials required and this is adjusted after receiving the raw
material. The final settlements take place only after deducting the advances amount from total
amount

t.
CURRENT LIABILITIES:
Current liabilities are those which are payable during an accounting year. These are paid
out of current assets like cash. When current assets availability is present there exist the current
liabilities but current assets must always be in excess to current liabilities. This provides the
organization to be in a good position.

SUNDRY CREDITORS
Creditors are those from whom products are purchased on credit basis. These amounts are
paid within the accounting period. If the creditors number increase the amount payable also
increases which further increases the liquidity.

LINE OF CREDIT:
Banks to new business do not often give lines of credit. However, if your new business is
well capitalized by equity and you have good collateral, your business might qualify for one. A
line of credit allows you to borrow funds for short terms needs when they arise. The funds are
repaid once you collect the accounts receivables that resulted from the short-term sales peak.
Lines of credit typically are made for one year at a time and are expected to be paid off for 30 to
60 consecutive days sometime during the year to ensure that the funds are used for short-term
needs only.

SHORT TERM LOAN:

While your new business may not qualify for a line of credit from a bank, you might have
success in obtaining a one-time short-term loan (less than a year) to finance your temporary
working capital needs. If you have established a good banking relationship with a banker, he or
she might be willing to provide a short-terms note for one order or for a seasonal inventory
and/or accounts receivable buildup. In addition to analyzing the average number of days it takes
to make a product (inventory days) and collect on an account (account receivable days) Vs. the
number of days financed by accounts payable, the operating cycle analysis provides one other
important analysis. From the operating cycle, a computation can be made of the dollars required
to support one day of accounts receivables and inventory and the dollars provided by a day of
accounts payable. Working capital has a different impact on cash flow in a business.
.
DATA ANALYSIS & INTERPRETATION
 ANALYSIS AND INTERPRETATITON OF DATA
Calculation of Working Capital
(figures in Lakhs)
Particular 2015-16 2016-17 2017-18

Current Asset, Loans

and Advances:
46680.37 49764.70 46467.03
-Inventories
-Sundry Debtors 20391.85 23497.97 23762.92
- Cash and Bank
Balances 2275.53 2421.75 18147.29
-Other Current
Assets 171.18 159.79 138.20
- Loans and
Advances 16782 20618 21943

Gross Working
86300.93 96462.51 110458.44
Capital (a)
Current Liabilities
and Provision
-Current Liabilities 62473 64093 65107
-Provision

Total (b) 74435 75315 81680

Net Working Capital 11865 21146.51 28778.44

(a-b)
 Net Working Capital

Analysis through Chart

All Figures in lakhs

Net Working Capital

2015-16
2016-17
2017-18
 Statement Showing Changes in Working Capital

Particular 2015-16 2016-17

Current Asset, Loans and Advances:

-Inventories

-Sundry Debtors 46680.37 49764.70

- Cash and Bank Balances 20391.85 23497.97

-Other Current Assets 2275.53 2421.75

- Loans and Advances 171.18 159.79

16782 20618

Total(a) 86300.93 96462.51

Net Current Liability

Sundry Debtors 62473 64093

Provision 11962 11222

Total(b) 74435 75315
Working capital(a-b) 11865.93 21146.51
Increase in working capital 9281.51 ------------

Statement Showing Changes in Working Capital

 Particular 2016-17 2017-18

Current Asset, Loans and Advances:

-Inventories 49764.70 46467.03

-Stock 23497.97 23762.92

- Cash and Bank Balances 2421.75 18147.29

-Other Current Assets 159.79 138.20

- Loans and Advances 20618 21943

Total(a) 96462.51 110458.44

Net Current Liability

Sundry Debtors 64093 65107

Provision 11222 16573

Total(b) 75315 81680
Working capital(a-b) 21146.51 28778.44
Increase in working capital 763.94 ------

Statement Showing Fund Flow

For year 2015-16
Sources Amt. Application Amt.
(Rs.) (Rs.)
 Operative Profit 50922.53 Increase in working Capital 7631.94
Sale Of Assets 484.99 Purchase of Fixed Asset 8103.76
Interest Received 296.07 Decrease in Short term 16317.63
Sources Amt. Application Amt.
Dividend Received 813.86 Borrowings
Operative Profit 59903 Increase in working
Sale Of Investment 80.30 Dividend And Corporate Tax 6643.51
Sale on Asset 401.35 Capital 7631.94
Trade Receivables 3543.97 Interest Paid 5775.74
Sale of Investment Purchase of Fixed
Direct Tax Paid 11668.24
Total rent Received
Lease 56141.72
102.35 Total
Asset 56141.72
19758.39
Interest Received Repayment of Loans
Dividend Received 0.42 Decrease in Long 14298.83
222.43 term Borrowings
Interest paid 1680.20
434.09 Corporate Tax Paid 6017.40

11657.40
Total 61063.64 Total 61063.64
Statement Showing Fund Flow
For year 2016-17
Sources Amt. Application Amt.
Operative Profit 53940
Sale on Asset 966.12 Increase in working Capital 9281.51
Sale of Investment 79.03 Purchase of Fixed Asset 15746.08
Lease rent Received 0.21 Repayment of Loans 6275.43
Interest Received 273.41 Decrease in Short term
Dividend Received 723.68 liabilities 5745.45
Interest paid 7887.45
Corporate Tax Paid 11146.13

Total 55982.45 Total 53940

Statement Showing Fund Flow

For year 2017-18
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 interested to 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.
• Liquidity ratios.
• Current assets movements 'ratios,
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
satisfactory. On the other hand, if the current liabilities cannot be met out of the current assets
then the liquidity position is had. To measure the liquidity of a lit in, the following ratios can
be calculated:
1. CURRENT RATIO
2. QUICK RA RATIO

CURRENT RATIO
Current Ratio, also known as working capital ratio is a measure or 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 the relation between current assets and current liabilities. Thus,

Current Ratio Current Assets/Current Liabilities

The two component of this ratio are

CURRENT ASSET
CURRENT LIABILITIES
Current Assets include cash, marketable securities, bills receivable, sundry debtors, inventories and work-
in-progress. Current Liabilities include outstanding expenses, bills payable, dividend payable etc. A relative
high current ratio is an indication that the firm is liquid and has the ability to pay its current obligation in
time. On the other 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 liabilities is considered to be satisfactory
CALCULATION OF CURRENT RATIO:
Year 2015-16 2016-17 2017-18
Current Asset 86300.93 96462.51 110458.44
Current Liabilities 74435 75315 81680
Current Ratio 1.16:1 1.3:1 1.35:1

Analysis through Chart:-

5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
2015-16 2016-17 2017-18

Interpretation:
A current ratio is an indication that the company's current asset is more than its
current liabilities. The ideal current ratio is 2:1. Company's current ratio is less
than the ideal ratio. This shows that the company may face problems in paying
off its liabilities.

Quick Ratio:
Quick ratio is more rigorous test of liquidity than current ratio. Quick ratio may
be defined as the relationship between quick/liquid asset and current or liquid
liabilities. An asset is said to be liquid if it can be converted into cash with short
period without loss of value. It measures the firms capacity to pay off current
obligations immediately.

QUICK RATIO QUICK ASSETS/CURRENT LIABILITIES-BANK OVERDRAFT

Where Quick Asset are:
 Marketable Securities
 Cash in hand and Cash at bank
 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
firm's 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 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 liquidity
position if it has low paying debtors. On the other hand, a firm having a low
liquidity position if it has fast moving inventories.

CALCULATION OF QUICK RATIO:-

(Amount in Lakhs)
Year 2015-16 2016-17 2017-18
Quick Asset 39449.38 46537.72 63853.21
Current Liabilities 62473 64093 65107
Quick Ratio 0.63:1 0.72:1 0.98:1

Analysis through chart:-

 5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
2015-16 2016-17 2017-18

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 ratio is 1:1. Company's quick ratio is
less than the ideal ratio. This shows that the company might have some liquidity
problems.
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 ratio 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.

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. 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 good situation for any firm.

Working Capital Turnover Ratio=Cost of Sales/Net Working Capital

OR
Working Capital Turnover-Sales/Net Working Capital
Years 2015-16 2016-17 2017-18
Cost of Goods Sold 28710.7 33819.45 36042.91
Net Working Capital 11865.93 21146.51 28778.44
Working Capital Turnover 2.41 times 1.59times 1.25 times
 70000

60000

50000

40000

30000

20000

10000

0
2015-16 2016-17 2017-18

Interpretation:-

It is a relationship between turnover and working capital. It highlights how

effectively working capital is being used in terms of turnover it can help to
generate. It enables to find the structure of working capital cycle of organization.
No ideal values but higher the ratio stronger is the position of working capital.in
2015-16 it was 2.41 times and in 2016-17 it was 1.59 times a slight decrease
While in 2017-18 also it has decreased a bit. It is seen that the turnover in
increasing along with the working capital but the ratio of increase in turnover is
more than the ratio of increase in working capital and hence the working capital
ratio shows a downward movement.
 CONCLUSION

 CONCLUSION

 From the project we can say that working capital is blood vessel of any organization.
 The factor like bills payable and receivables owe the power to manage whole working capital of
business.
 Every company is depends upon its working capital rather than its fixed assets or fixed liability.
 Ratio analysis is further most important part of working capital which help one if understand the
status of current assets and current liability
 "Managing the working capital is Managing your Business.
 SUGGESTION

SUGGESTIONS
 General Suggestions:
 The company has to take steps to counter the rising input cost and domestic
competition through cost reduction, rationalization of products and distribution channels,
judicious inventory management and research and development.
 It is seen that as the inventory carrying cost is reducing because of the falling interest rates, the
company may stock more if desired.

 Specific Suggestions

 Use Just in time method.

 Not to give all payment of Raw Material but payment should be equally
distribute among small suppliers also.
 Lack of advertisement.

BIBLIOGRAPHY
BIBLIOGRAPHY

 BOOKS

 Khan M.Y. and Jain P.K, 'Financial Management (Text and

Problems)', Tata McGraw-Hill Publishing Co. Ltd. New
Delhi, Third Edition
 Bodhanwala R J., Taxman's Learning Financial
Management using Financial Modelling, Taxmann Allied
Services Pvt. Ltd., New Delhi, July 2003 Edition
 Pandey LM., Financial Management". Vikas Publishing
Houses Pvt. Ltd., New Delhi, Eighth Edition.

 Journals
 Annual reports of Shree Krishna Engineering Works of financial year 2015-16, 2016-17, 2017-18.

 Internet sites:

www.sreekrishnaengineering.com
 ANNEXURE

Balance Sheet As On 30 June 2015

Particular As At 30 June 2015
Equity And Liabilities
Shareholder’s funds

Share capital 2540.54

Reserves and surplus 93952.60 96493.14
Non-current Liabilities

Long-term borrowing 26464.58

Deferred tax liabilities 11675.13
Other Long term liabilities 279.75
Long term provisions 834.69 74791.03
Current Liabilities
Short-tern borrowing 12265.58
Trade Payables 27789.55
Other current Liabilities 24348.44
Short-tern Provisions 10387.16 74791.03
Total Equity And Liabilities
210538.32
Assets
Non-current Asset
Fixed Assets

Tangible assets 108200.40

Intangible assets 589.91
Capital work –in-progress 1807.94
Non-current investment 3364.12
Long term loan and Advances
Other non-current asset 6822.77
21.29 120806.43
Current Assets

Inventories 49764.70
Trade Receivables 23497.97
Cash and Bank Balance 2695.37
Short-term loans and advances
Other current Asset 13614.06
159.79 89731.89
Total Assets 210538.32

Balance Sheet as on June 2016

Particular As At 30 June 2016
Equity And Liabilities
Shareholder’s funds

Share capital 2540.54

Reserves and surplus 77709.62 80250.16
Non-current Liabilities

Long-term borrowing 23176.28

Deferred tax liabilities 9065.18
Other Long term liabilities 304.62
Long term provisions 994.77 33540.25
Current Liabilities

Short-tern borrowing 17710.93

Trade Payables 34875.44
Other current Liabilities 18699.79
Short-tern Provisions 10496.10 81782.26
Total Equity And Liabilities
195573.27
Assets
Non-current Asset
Fixed Assets

Tangible assets 101998.42

Intangible assets 775.66
Capital work –in-progress 3304.56
Non-current investment 3364.12
Long term loan and Advances
Other non-current asset 4751.76
19.21 114213.73
Current Assets

Inventories 46680.37
Trade Receivables 20391.85
Cash and Bank Balance 2275.53
Short-term loans and advances
Other current Asset
171.18 81359.54
Total Assets 195573.27