Working Capital
Working Capital
Working Capital
Ltd
manage the current assets, the current liabilities and the inter relationship that exist
between them. The term current assets refers to those assets which in ordinary course of
business can be, or, will be, turned in to cash within one year without undergoing a
diminution in value and without disrupting the operation of the firm. The major current
assets are cash, marketable securities, account receivable and inventory. Current liabilities
are those liabilities which intended at there inception to be paid in ordinary course of
business, within a year, out of the current assets or earnings of the concern. The basic
current liabilities are account payable, bill payable, bank over-draft, and outstanding
expenses. The goal of working capital management is to manage the firm’s current assets
and current liabilities in such way that the satisfactory level of working capital is
mentioned. The current assets should be large enough to cover its current liabilities in
Definition:-
1. According to Guttmann & Dougall -
“The excess of current assets of a business (i.e. cash, accounts receivables, inventories)
over current items owned to employees and others (such as salaries & wages payable,
Working capital is regarded as the lifeblood of a business. It’s effective provision can do
much to ensure the success of a business while it’s inefficient management can lead not
only to loss of profits but also to the ultimate downfall of what otherwise might be
A study of working capital is of major importance to the internal and external analysis
because of its close relationship with the day-to-day operations of a business. As pointed
working capital is the leading cause of business failures. Working capital is that portion
of the assets of a business that are used in or related to current operations, and is
represented at any time by the operating cycle of such items as against receivables,
In accounting, Working capital is the difference between the inflow and outflow of funds.
In other words, it is the net cash inflow. It is defined as the excess of current assets over
Working capital represents the total of all current assets. In other words, it is “gross
working capital”.
It is also known as circulating capital or current capital for current assets that are rotating
in nature. The use of term “circulating capital” instead of “working capital” indicates its
MANAGEMENT
Funds are needed for short-term purposes for the purchase of raw materials, payment of
wages and other day-to-day expenses, etc. These funds are known as working capital.
Working capital represents the total of all current assets. In other words, it is “gross
working capital”. It is also known as circulating capital or current capital for current
assets that are rotating in nature. The use of term “circulating capital” instead of “working
The working capital is important for several reasons. Like the current assets of a typical
manufacturing firm account for half of its total assets. For a distribution company, they
account even more. Executive levels of current assets can easily result in a firm realizing
However, firms with too few current assets may incur shortages and difficulties in
Gross working capital: Simply called as working capital, refers to the investment in
current assets. Current assets are the assets, which can be converted into cash within an
accounting year (or operating cycle) and include cash, short-term securities, debtors, bills
Net working capital: Refers to the difference between current assets and current
liabilities. Current liabilities are those claims from outsiders, which are expected to
mature for payment within an accounting year and include creditors, bills payable and
outsider’s expenses.
Under laying the sound working capital management, lays two fundamental decision
issues for the firm. They are for the determination of:
2. The appropriate mix of short-term and long-term financing used to support this
In turn, these decisions are influenced by the trade-off that must be made between
profitability and risk. Lowering the level of investment in current assets, while still being
able to support sales, would lead to an increase in the firms’ return of total assets. To the
extent that the explicit costs of short-term financing, the greater the proportion of short-
term debt to total debt, the higher is the profitability of the firm.
The working capital is essentially the circulating capital has been admirably summed up
by Brown and Howard, who compare it with a river which is always there but, whose
water level is constantly changing. However some transactions are totally independent of
the circular process, for they have no line with operational flows. Borrowing from one
such source to repay the past loans from another source is one such transactions,
one segment of the capital structure of the business but constitutes an inter-woven part of
“Float” is the amount of money required to get into business. This is the minimum
amount necessary for maintaining a going concern, which is in a position to serve its
customers. This amount of float in the form of cash, inventory and other current assets is
the minimum cushion needed to support the business. A business needs a working capital
over and above the float. The requirements of a business moreover, are governed by the
rate of its turnover, type of credit, the seasonality of its operations, break even point and
Apart from these, the management strategies planned extent of growth due to vast
unexplored market etc also largely influence the requirement of working capital.
The need for working capital gross or current assets cannot be over emphasized. As
a steady amount of profit requires successful sales activities. There is a need for working
capital in the form of current assets to deal with the problem arising out of lack of
immediate realization of cash against goods sold. Therefore sufficient working capital is
necessary to sustain sales activity. Technically this is refers to operating or cash cycle. If
the company has certain amount of cash, it will be required for purchasing the raw
material may be available on credit basis. Then the company has to spend some amount
for labor and factory overhead to convert the raw material in work in progress, and
ultimately finished goods. These finished goods convert in to sales on credit basis in the
form of sundry debtors. Sundry debtors are converting into cash after expiry of credit
period. Thus some amount of cash is blocked in raw materials, WIP, finished goods, and
sundry debtors and day to day cash requirements. However some part of current assets
may be financed by the current liabilities also. The amount required to be invested in this
current assets is always higher than the funds available from current liabilities.
This is the precise reason why the needs for working capital arise.
To pay wages.
To incur day-to-day expenses and overhead costs such as fuel, power and office
expenses, etc.
OPERATING CYCLE
The duration of time required to complete the following cycle of events in case of a
4. Conversion of finished goods into debtors and bills receivable through sales.
O=R+W+F+D-C
C = Creditors period.
Since, the cash inflows and cash outflows do not match, the firm has to necessarily keep
position to meet the obligations when they become due. Similarly, the firms must have
adequate inventory to guard against the possibility of not being able to meet the demand
for their products. Adequate inventory, therefore, provides a cushion against being out of
stock. If firms have to be competitive, they must sell goods to their customers on credit,
DEBTORS (RECEIVABLES)
The firm begins with the purchase of Raw materials, which are paid for after a delay,
The firm converts the raw materials into finished goods and then sells the same. The time
lag between the purchase of raw materials and the sale of finished goods is the inventory
period. Customers pay their bills sometime after the sales. The period that elapses
between the date of sales and the date collection of receivables is the accounts payable
The operating cycle creates the need for current assets (working capital). However the
need does not come to an end after the cycle is completed to explain this continuing need
working capital.
The need for current assets arises, as already observed, because of the cash cycle. To
carry on business certain minimum level of working capital is necessary on continues and
uninterrupted basis. For all practical purpose, this requirement will have to be met
permanent as with other fixed assets. This requirement refers to as permanent or fixed
working capital.
Any amount over and above the permanent level of working capital is temporary,
fluctuating or variable, working capital. This portion of the required working capital is
needed to meet fluctuation in demand consequent upon changes in production and sales
The balance sheet working capital is one which is calculated from the items appearing in
Assets, and net working capital, which is represented by the excess of current assets over
Cash working capital is one which is calculated from the items appearing in the profit and
loss account. It shows the real flow of money or value at a particular time and is
basis of the operating cycle concept which has assumed a great important in financial
management in recent years. The reason is that the cash working capital indicates the
Negative working capital emerges when current liabilities exceed current assets. Such a
situation is not absolutely theoretical, and occurs when a firm is nearing a crisis of some
magnitude.
Sources of financing of working capital differ as per the classification of working capital
LONG-TERM FINANCING:
Floating of debentures.
Issue of shares.
SHORT-TERM FINANCING:
Short-term financing refers to those sources of short-term credit that the firm must
Short-term loans.
Commercial papers.
Matching Approach:
When the firm follows the matching approach, the firm’s fixed assets or
permanent assets are financed with long-term funds and as the level of these assets
increases.
The temporary or variable current assets are financed with short-term funds and
as their level increases. Under, matching plan no short-term financing will be used
Conservative Approach:
A firm in practice may adopt a conservative approach in financing its current and
fixed assets. The financing policy of the firm is said to be conservative when it
depends more on the long-term funds for financing needs. Under the conservation
plan, the firm finances its permanent assets and also a part of temporary current
assets, the idle long-term funds can be invested in the tradable securities to
conserve liquidity.
Aggressive Approach:
An aggressive policy is said to be followed by the firm when it uses mere short-
term financing than warranted by the matching plan. In aggressive policies, the
firm finances a part for its permanent current assets with short-term financing.
Some extremely aggressive firms may even finance a part of their fixed assets
with short-term financing. The relatively more use of short-term financing making
A firm should decide whether or not it should use short-term financing. If short-term
financing has to be used, the firm must determine its position in total financing. This
Short-term financing may be preferred over long-term financing for two reasons; cost
advantage and flexibility. Short-term financing is more risky than long-term financing.
Short-term financing is less expensive than long-term financing, but at the same time
short-term financing involves greater risks than long-term financing. The choice between
long-term and short-term financing involves trade-off between risk and return.
Sufficient working capital ensures regular supply of raw materials and continuous
production.
A company which has ample working capital can make regular payment of
salaries, wages and other day-to-day commitments which raises the morale of its
employees, increases their efficiency, reduces wastages and costs and enhances
Only concerns with adequate working capital can exploit favorable market
conditions such as purchasing its requirements in bulk when the prices are lower
such as depression because during such periods, generally, there is much pressure
on working capital.
The firm should maintain a sound working capital position. It should have adequate
working capital to run its business operations. Both excessive as well as inadequate
working capital positions are dangerous from the firm’s point of view.
way tends to make the dividend policy liberal and difficult to cope in future when
Excessive working capital means idle funds which earn no profits for the business
and hence the business cannot earn a proper rate of return on its investments.
A concern which has inadequate working capital cannot pay its short-term
liabilities in time. Thus, it will lose its reputation and shall not be able to get good
credit facilities.
It becomes difficult for the firm to exploit favorable market conditions and
The firm cannot pay day-to-day expenses of its operations and it creates
of liquid funds.
The rate of return on investments also falls with the shortage of working capital.
1. Nature of business:
The working capital requirement of the firm is closely related to the nature of its
business and the industry to which it belongs. Small companies have small
which has a short operating cycle which sells predominantly on cash basis, has a modest
working capital requirement on the other hand a manufacturing concern like a machine
tools unit, which has a long operating cycle and which fills largely on credit, has a very
Firms, which have marked seasonality in their operations usually, have high
Similarly, it will be more expensive during slack periods when the firm has to
sustain its working force and physical facilities without adequate production and
3. Production policy:
policy, which may reduce the sharp variations in working capital requirements.
throughout the year rather than intensify the production activity in the peak
business season. Such a production policy may dampen the fluctuations in the
4. Price-level changes:
The increasing shifts in the price level make the functions of financial manager
difficult. They should anticipate the effect of price level changes on working
capital requirements of the firm. Generally, rising price levels will require a firm
to maintain a higher amount of working capital. The firms will feel the effect of
5. Profit-margin:
Firms differ in their capacity to generate profit from business operations. Some
management or monopoly power in the market and earn a high profit margin.
and may earn low margin of profits of the high net profit margin contributes
towards the working capital pool. In fact, the net profit is a source of working
6. Credit policy:
The credit policy of the firm affects the working capital by influencing the levels
of book debts. The credit terms granted to the customers may depend upon the
norms of the industry the firm may belong. But the firm has the flexibility of
shaping its credit policy within the constraint of industry norms and practices. The
credit policy influences the requirement of the working capital in two ways.
Firstly, credit terms granted to the customers by the firm. And, secondly, credit
Depending upon the individual case, different terms may be given to different
customers. A liberal policy without rating the credit worthiness of customers will
be detrimental to the firm and will create problems to the firm later on. The firm
should be prompt in making collections. A high collection period will mean tie-up
7. Availability of credit:
The working capital requirements of the firm are also affected by credit terms
granted by its creditors. For a firm with less working capital, liberal credit terms
are available to it. Similar availability of credit from banks also influences the
working capital needs of a firm. A firm, which can get bank credit easily on
favorable conditions, will operate with less working capital than a firm without
such a facility.
CURRENT ASSETS:
4. Receivables arising out of sales other than deferred receivables (including bills
those in transit.
12. Advance for purchase of raw materials, components and consumable stores.
13. Deposit kept with public bodies, etc. for normal business operation.
14. Money receivable from contracted sale of fixed assets during the next twelve
months.
CURRENT LIABILITIES:
1. Short-term borrowings (including bills purchased and discounted) from banks and
others.
4. Sundry creditors (trade) for raw materials and consumable stores and spares.
9. Statutory liabilities:
1. Dividends.
the company regarding the level of current assets, as to how much stock of
sufficiently and reasonably safe, so as to fairly avoid the possible risk of stock
outs (in the case of raw materials) and losses of business (in the case of finished
goods) and the resultant losses. Based upon these criteria, the working capital
The company may prefer to have somewhat heavy cash balance and bank balance
stocks of raw materials and finished goods with a view to almost eliminating the
risk of stock outs and losers of sales. Such companies may also prefer to have a
sundry debtors. All this investments in the various components of current assets
will naturally require correspondingly higher levels of current liabilities and the
The level of current asset and accordingly the working capital requirement, will,
restrictive working capital policy. But again, too much of restrictive working
stock – out risk and the consequential losses of production and lowering of the
will be moderate, too, that is, neither too high nor too low but just right.
Banks are main institutional source of working capital finance in India. After trade credit,
bank credit is the most important source of financing working capital in India. A bank
considers a firm’s sales and production plane and desirable levels of current assets in
determining its working capital requirements. The amount approved by bank for the
firm’s working capital is called credit limit. Credit limit is the maximum funds which a
firm can obtain from the banking system. In practice banks do not lend 100% credit limit;
1. Term Loan
2. Overdraft
3. Cash credit
1) Term Loan
In this case, the entire amount of assistance is disbursed at one time only, either in cash or
to the company’s account. The loan may be repaid in installments along with interest
2) Overdraft
In this case, the company is allowed to withdraw in excess of the balance standing in its
Bank account. However, a fixed limit is stipulated by the Bank beyond which the
company will not able to overdraw the account. Legally, overdraft is a demand assistance
given by the bank i.e. bank can ask repayment at any point of time.
3) Cash credit
In practice, the operations in cash credit facility are similar to those of overdraft facility
except the fact that the company need not have a formal current account. Here also a fixed
limit is stipulated beyond which the company is not able to withdraw the amount.
This form of assistance is comparatively of recent origin. This facility enables the
company to get the immediate payment against the credit bills / invoice raised by the
company. The banks hold the bills as a security till the payment is made by the customer.
The entire amount of bill is not paid to the company. The company gets only the present
worth of amount of bill form of discount charges. On maturity, bank collects the full
RESEARCH DESIGN
INTRODUCTION
steps, those are generally adopted by a researcher in studying his problem along with the
logic behind them. It is important for researcher to know not only the research method but
also know methodology. ”The procedures by which researcher do about their work of
comprise the procedures used for generating, collecting and evaluating data. All this
means that it is necessary for the researcher to design his methodology for his problem as
the same may differ from problem to problem. Data collection is important step in any
project and success of any project will be largely depend upon how much accurate you
will be able to collect and how much time, money and effort will be required to collect
that necessary data, this is also important step. Data collection plays an important role in
research work. Without proper data available for analysis you cannot do the research
work accurately.
Working Capital Management being an integral part of the overall corporate management
throws open challenges and an opportunity to study the Working Capital Management as
The company is facing the following problems related to the Working Capital
Management:
This study was conducted at PROSEAL CLOSURES PVT. LTD., Bangalore. This study
will cover the financial analysis of debtors and inventories’ behavior. Other Current
Assets and Current Liabilities are also analyzed. An attempt has been made to interpret,
Study of the working capital management is important because unless the working
company cannot earn profits and increase its turnover. With this primary objective
of the study, the following further objectives are framed for a depth analysis.
To study different components of current assets, the extents of the funds tied up
in each, the reason for high volume of debtors, inventories, etc. and suggest
possible solutions.
A study of Working Capital is of major importance to the internal and external analysis
because of its close relationship with the day-to-day operations of a business. The
business firms aim at maximizing the wealth of the shareholders, for this the firm should
Earning a steady amount of profit requires a successful sales activity. Current assets are
COLLECTION OF DATA:
PRIMARY DATA:
The data was collected from discussions with the executives and the finance
manager. Primary data are that, which are collected freshly and for first and thus happens
to be original in character.
Observation method.
Personal interview.
SECONDARY DATA:
The data which have been collected from some one else and which have already
Annual reports.
Internet.
ANALYSIS OF DATA:
The data was analyzed using the following tools and techniques of financial analysis:
Trend analysis
Ratio analysis.
RESEARCH METHODOLOGY:
This being an analytical study, data for the study was collected by the concerned official
Time restriction.
The information, which was needed could not be made public by the organization.
The findings were substantially based on information given by the annual reports
of the company.
Only those concepts that have a direct bearing on working capital management of
company’s financial position were studied and covered. Those concepts that have
an indirect bearing on the company’s financial plan are not covered in the study.
Due to strict policies and guidelines of the company on certain matters like
in this report.
COMPANY PROFILE:
Closures System for the Steel Drum Industry. From a humble beginning, the Company
made a global presence by establishing customer base in U.S.A, Middle East, Far East
In the year 2001 the Company became a subsidiary of M/s. Greif U.S.A, which acquired
a majority stake through its joint venture M/s. Balmer Lawrie- Van Leer Ltd., India.
Located in the garden city of India, Bangalore, also recognized globally as one of the
highly industrialized cities, PROSEAL provides a conducive environment for turning out
and efficient after sales service, PROSEAL has now won the hearts of many a barrel
manufacturer.
Global acceptance of barrel closures and accessories has led to regular exports to USA,
UK, Canada, and Australia, Far-East, Middle East and a host of other countries. Growth
of PROSEAL is attributed to its ability to meet the changing and challenging needs of
BOARD OF DIRECTORS:
S.K.Mukherjee
P.B.Anandrao
Suchitra Bhat
Prakash Prabhu
CUSTOMER BASE:
The Company has a substantial market share in India for its products - Drum Closures,
Flanges, Plugs and Cap seals. The Customers include Steel Drum Manufacturers, Oil
Companies and Chemical Companies. The Company also services the requirements of
Steel Drum manufacturers in U.S.A, Canada, Middle East, Africa, Australia and Far
Eastern Countries. It has a Warehousing facility in the U.S to ensure delivery at the right
time.
ORGANISATIONAL CHART
Board of directors
Managing director
Assistant Officer
marketing purchaser Accounts System
manager analyst
Assistant
Office manager
assistant dispatch Accounts
Assistant assistant
technicians
GOAL:
To enter new millennium and scale new heights. To get recognized as one of the best and
its customers.
MISSION:
VISION:
satisfaction.
All our commitments, actions and products must be recognized as the expression
of quality.
Values:
professional growth.
POLICIES USED:
Quality policy:
Environmental policy:
Material policy:
time.
PRODUCT FOCUSED:
CLIENTS:
DOMESTIC:
INTERNATIONAL:
The consideration of the level of investment in current assets should avoid two danger
points excessive and inadequate investment in current assets. Investment in current assets
should be just adequate, not more or less, to the need of the business firms. Excessive
investment in current assets should be avoided because it impairs the firm’s profitability,
as idle investment earns nothing. On the other hand inadequate amount of working capital
can be threatened solvency of the firms because of its inability to meet its current
obligation. It should be realized that the working capital need of the firms may be
fluctuating with changing business activity. This may cause excess or shortage of
In the words of S.P. Gupta “The term trend is very commonly used in day-today
conversion trend, also called secular or long term need is the basic tendency of
population, sales, income, current assets, and current liabilities to grow or decline over a
period of time”
This method determines the direction upwards or downwards and involves the
computation of the percentage relationship that each statement item bears to the same
The information for a number of years is taken up and one year, generally the first year, is
taken as a base year. The figures of the base year are taken as 100 and trend ratios for
other years are calculated on the basis of base year. The analyst is able to see the trend of
Table 1: Table showing the trend analysis of the Working Capital of PROSEAL Ltd., for
Current Assets
Sundry Debtors 28043822 24370416 25890546 44923035 100 86.9 92.3 160.2
Cash and Bank balances 3014705 3946627 10375816 8930476 100 130.9 344.2 296.2
Loans and Advances 21497656 21625545 26690417 38439726 100 100.6 124.1 178.8
11822554 11378918 15126744 18333544
Total Current Assets 5 2 3 0 100 96.2 127.9 155.1
Current Liabilities and
Provisions
Current Liabilities 47843821 59005489 70239991 72845717 100 123.3 146.8 152.2
Total Current Liabilities 63544916 74933064 94146734 10908983 100 117.9 148.2 171.7
and Provision 2
104.
Net Working Capital 54680629 38856118 57120709 74245608 100 71.1 5 135.8
Table 2: Table showing working capital size of PROSEAL CLOSURE Ltd over the last
four years.
GRAPH-1
INTERPRETATION:
Current Assets
The inventories have reduced to 97.2% in the year 2008 and has increased by
34.5% in the year 2009 and 38.6% in the year 2010, taking 2007 as the base year.
This suggests that there has been an increase in the demand for the company’s
products in the year 2009 and 2010, which has led to an increase in the production
Debtors has decreased to 86.9% in the year 2008and 92.3% in the year 2009, but
since there is an increase in the demand for the products manufactured by the
Cash and bank balances have increased by 30.9% in the year 2008 and there has
been a drastic increase by 244.2% and 196.2% in the year 2009 and 2010
respectively, taking 2007 as the base year. This is mainly due to the increase in
Loans and advances have increased by 0.6% in the year 2008. But it has
tremendously increased by 24.1% and 78.8% in the year 2009 and 2010
respectively.
current assets have increased by 27.9% and 55.1% in the years 2009 and 2010
respectively. But there has a decrease in the total current assets to 96.2% in the
year 2007.
100000000
80000000
60000000
40000000
Inventories
20000000 Sundry Debtors
0
2007 2008 2009 2010
Inventories 65669362 63846594 88310664 91042203
GRAPH-2
40000000
30000000
20000000
GRAPH-3
Analysis of current assets components enable one to examine in which components the
working capital fund has locked. A large tie up of funds in inventories affects the
profitability of the business or the major portion of current assets is made up cash alone,
(No. in %)
60
50
Inventories
40
Sundry debtors
30
Cash and bank
balance
20 Loans and advances
10
0
2007 2008 2009 2010
GRAPH-4
INTERPRETATIONS:
The excess of current assets is showing positive liquidity position of the firm but it is not
always good because excess current assets then required, it may adversely affects on
profitability. Current assets include some funds investments for which company pay
interest. It is clearly observed that an inventory has increased gradually by the year 2009.
But it has declined in the year 2010. Though there is not much increase in % of cash and
bank balance, there is a study growth. Loans and advances have decreased by the year
2010 and forms 20.97% of the total current assets. Sundry debtors’ shows improve mental
growth in 2010 and forms 24.5 % of the total current assets. Current assets components
show sundry debtors are the major part in current assets it indicates that the inefficient
collection management. Over investment in the debtor affects liquidity of firm for that
company has raised funds from other sources like short term loan which incurred the
interest.
Current Liabilities:
The increase in the Current Liabilities of the years 2008, 2009 and 2010 can be
demand. The current liabilities have increased by 23.3%, 46.8% and 52.2% in the
years 2008, 2009 and 2010 respectively, taking the year 2007 as the base.
Provisions have witnessed a drastic rise from 101.4% in the year 2008 to 152.3%
Due to the mammoth increase in the provisions over the years, the total Current
The common size statements, namely balance sheets and income statement are shown in
analytical percentages. The individual figures are shown as percentages of total assets and
total liabilities for a common size balance sheet. Similarly, the individual figures from the
profit and loss account are shown as percentages of total sales, for example, the total
assets are taken as 100 and different assets are expressed as a percentage of the total.
These statements are also known as Component Percentages or 100 Percent Statements
It must be noted here that for the purpose of the project report i.e., to study the working
capital, common size statement is one of the tools used. For this sole purpose the total
current assets and current liabilities are taken as a 100, and the different components of
the current assets and current liabilities are shown as percentages of the total.
Table 4: Table showing common size statement of Current Assets and Current Liabilities
Current
Assets
Current
Liabilities
and
Provisions
Current
Liabilities 47843821 75.29 59005489 78.74 70239991 74.61 72845717 66.78
Provisions 15701095 24.71 15927575 21.26 23906743 25.39 36244115 33.22
Total
Current
Liabilities 63544916 100.00 74933064 100.00 94146734 100.00 109089832 100.00
INTERPRETATION:
Table 5: Table showing the Working Capital Position of PROSEAL Ltd. over the last
four years.
31/03/200
Particulars 7 31/03/2008 31/03/2009 31/03/2010
The Working Capital has decreased in the year 2008, but increased considerably in the
other three years. Though the investment in working capital has not been adequate in the
year 2008, it has increased immensely in the following two years. Working capital must
be effectively utilized for the overall profitability of the firm. The firm should maintain a
sound working capital position. It should have adequate working capital to run its
200000000
150000000
100000000
50000000
Current Assets
0
Current Liabilities
2007 2008 2009 2010
31/03/2005 31/03/2006 31/03/2007 31/03/2008
GRAPH-5
An increase in the Total Current Assets and a decrease in the Total Current
Liabilities have resulted in an increase in the Net Working Capital in the years
The Net Working Capital has decreased to 71.1% in the year 2008. It has
increased by 4.5% and 35.8% in the years 2009 and 2010 respectively.
80000000
70000000
60000000
50000000
40000000 Net Working Capital
30000000
20000000
10000000
0
2007 2008 2009 2010
GRAPH-6
Liquidity Position:
A major portion of the current assets is formed by inventories and sundry debtors. Cash
and other marketable securities form a very minimal portion of the total current assets.
Thus, though the company has a lot of investment in current assets, the amount of cash
that can be realized at a moment’s notice is very less and it would serve the firm better to
improve its cash reserves so that creditors and other debts can be paid off at any time and
The changes in sales and operating expenses may be due to three reasons
There may be long run trend of change e.g. The price of raw materials may
Cyclical changes in economy dealing to ups and downs in business activity will
2. Policy changes:-
The second major case of changes in the level of working capital is because of policy
changes initiated by management. The term current assets policy may be defined as the
3. Technology changes:-
The third major point in changes in working capital is changes in technology because
changes in technology to install that technology in our business more working capital is
required. A change in operating expenses rise or full will have similar effects on the
levels of working following working capital statement is prepared on the base of balance
Table 6: Table showing changes in working capital of PROSEAL Ltd. over the last four
years.
A) Current assets
B) Current liabilities
INTERPRETATION:
current assets have increased by 27.9% and 55.1% in the years 2009 and 2010
respectively.
An increase in the Total Current Assets and a decrease in the Total Current
Liabilities have resulted in an increase in the Net Working Capital in the years
The Net Working Capital has decreased to 71.1% in the year 2008. But it has
increased by 4.5% and 35.8% in the years 2009 and 2010 respectively.
OPERATING CYCLE:
The need of working capital arrived because of time gap between productions of goods
and their actual realization after sale. This time gap is called “Operating Cycle” or
“Working Capital Cycle”. The operating cycle of a company consist of time period
between procurement of inventory and the collection of cash from receivables. The
operating cycle is the length of time between the company’s outlay on raw materials,
wages and other expanses and inflow of cash from sales of goods.
To calculate the operating cycle of PROSEAL Ltd for the last four years data. Operating
cycle of the PROSEAL Ltd. vary year to year as changes in policy of management about
Table 7: Table showing operating cycle of PROSEAL Ltd. over the last four years.
(No. of Days)
ADD
W-I-P period 4 3 2 1
LESS
(No. of Days)
60
40
20
0
2007 2008 2009 2010
GRAPH-7
200
180
160
Raw material holding
140 period
20
0
2007 2008 2009 2010
GRAPH-8
INTERPRETATION:
Operating cycle of PROSEAL Ltd, shows the numbers of day are decreasing in recent
Years and it is reflecting the efficiency of management. Days of operating cycle shows
period of lack of funds in current assets, if number of days are more than it increases the
cost of funds as taken from outside of the business. In 2008, shows the high no. of days
MANAGEMENT
CASH MANAGEMENT
Cash is the most important current asset for the operation of a business. Cash is the basic
input needed to keep the business running on a continuous basis. It is also the ultimate
firm should maintain an optimum level of cash, neither more nor less. Cash shortage will
disrupt any firm’s manufacturing operations, while excessive cash will remain idle,
A cash budget is the most significant tool devised for the control of cash receipts and
payments. A cash budget is a statement which summarizes the expected cash inflows and
Cash forecasts are needed to prepare cash budgets. Cash forecasting may be done on a
Companies often have surplus funds for short periods of time before they are required for
capital expenditure, loan repayments or for any other purpose. These funds may be
deployed in many ways. At one end of the spectrum is the term deposit that can be made
for a minimum of 46days in a bank which is a risk-free investment that offers a relatively
modest rate of interest and at the other end of the spectrum is the investment in equity
shares which can produce highly volatile returns. In between lie several avenues like units
of a mutual fund scheme, public sector bonds, treasury bills, inter corporate deposits etc.
In order to enhance the efficiency of cash management, the following practices are
followed:
Time lag between sales and the negotiations with the banker is almost reduced to
nil.
Personal follow up is also affected to ensure that the reimbursements are realized
Cash does not enter in to the profit and loss account of an enterprise, hence cash is neither
profit nor losses but without cash, profit remains meaningless for an enterprise owner.
2. An efficient cash management through a relevant and timely cash budget may
enable a firm to obtain optimum working capital and ease the strains of cash shortage,
3. Cash management involves balance sheet changes and other cash flow that do
not appear in the profit and loss account such as capital expenditure.
Table 8: Table showing the Size and indices of cash in PROSEAL Ltd.,
GRAPH-9
INTERPRETATION:
Cash and bank balances have increased by 30.9% in the year 2008 and there has been a
drastic increase by 244.2% and 196.2% in the year 2009 and 2010 respectively, taking
2007 as the base year. This is mainly due to the increase in production on one hand and
CASH CYCLE:
One of the distinguishing features of the fund employed as working capital is that
It is also known as ‘circulating capital’ which means current assets of the company,
which are changed in ordinary course of business from one form to another, as for
DEBTORS CASH
FINIHED RAW
GOODS MATERIALS
WIP
Basically cash management strategies are essentially related to the cash cycle together
with the cash turnover. The cash cycle refers to the process by which cash is used to
purchase the raw material from which are produced goods, which are then send to the
customer, who later pay bills. The cash turnover means the number of time firms cash is
(Days)
INTERPRETATION:
The size of the cash in the current assets of the company indicates the miss cash
management of the company. The cash balance in the year 2009 was extremely increased;
because of encashment of deposits from schedules bank funds. Company failed to proper
investment of available cash. After the study of cash management it mentioned above it
can be conclude that management of cash involve three things: a) Managing cash flow
into and out of the firm. b) Managing cash inflow within the firm, c) Financial deficit or
investing surpluses cash and thus controlling cash balance at a point of a time.
The firm should hold an optimum balance of cash and invest any temporary excess
amount in short term marketable securities such as treasury bills, commercial papers,
The high portion of cash balance in the current assets it adversely affected on profitability
of the company as cash is ideal asset; it reduced the working capital leverage.
INVENTORY MANAGEMENT
The term inventory refers to the stock of products a firm is offering for sale. In other
words, inventory is composed of assets that will be sold in the future in the normal course
of business operations. The inventory of a firm is the sum total of the raw materials,
Raw materials consist of items purchased by a firm from others for conversion into
currently in the stage of production. These are partially finished goods that are at various
The objective of inventory management at Proseal Closures Ltd. consists of two counter-
balancing parts:
2. To meet the demand for the product by efficiently organizing the firm’s
The firm has a comprehensive system for monitoring its inventory levels based on its own
experiences. The sales budget is the basis for the production and materials requirement
planning.
Inventory components
I) Raw material
To analyze the level of raw material inventory and work in progress inventory held by the
firm on an average it is necessary to examine the efficiency with which the firm converts
(No of days)
WIP 43 31 22 113
Inventories indices
500
433.68
450
400
350
300 248.07
250
200 Inventories indices
142.57
150 100
100
50
0
2007 2008 2009 2010
z
GRAPH-10
INTERPRETATION:
Size of inventory of PROSEAL Ltd, was increasing with the increase in the sales. The
inventory size was increasing because of increment in the finished goods stock; it
indicates that the company reduced the liquidity of finished goods. The graph shows an
increase in inventories size. In the year 2010 the inventories indices% is 433.68.
RECEIVABLES MANAGEMENT
The term receivable is defined as “debt owed to the firm by customers arising from sale
of goods or services in the ordinary course of business”. While business firms would like
to sell goods for cash, the pressure of competition and the force of custom persuade them
those customers who cannot borrow from other sources or find it very expensive to do so.
The credit period extended by business firms usually ranges from 15 days to 60 days.
When goods are sold on credit, finished goods gets converted into accounts receivables in
the books of the seller. A firm’s investment in accounts receivables depends on how
much it sells on credit and how long it takes to collect the receivables. The objectives of
Since receivables often account for a significant proportion of the total assets, it
following variables:
1. Credit standards :
It refers to the maximum risk that a firm is willing to take in extending credit.
Lowering the credit standard may increase credit sales. This in turn will
increase the accounts receivables which increases the collection cost and risk
phase of the business cycle of the firm, it has excess capacity and may use
3. Credit information:
4. Bank reference :
It is another source of collecting credit information. The bank with which the
applicant has dealings can provide such information. Trade references are also
used to collect credit information. The firms who have had business dealings
with the applicant can provide useful information about the applicant.
include age wise analysis of accounts payable, profitability and liquidity ratio.
Qualitative assessment will include consideration of references from other suppliers and
bank reference. The ultimate decision is whether or not to extend credit and deciding the
terms of credit which depends on subjective interpretation of the assessment of the above
mentioned analysis.
6. Credit period:
six months. A major consideration for the company is to see what competitors
7. Collection effort:
Rejecting new orders for supply until the last dues are paid.
The normal credit period allowed by the firm is 30 to 60 days. To ease the funds tied up
in the receivables, the firm has applied the following two measures:
1. Factoring
2. Securitization of Debts
Factoring:
Factoring is a method of financing where by a company sells its trade debts at a discount
financial institution, namely the factor, and a company which sells goods and services to
trade customers on credit. As per this arrangement, the factor purchases the client’s trade
debts including accounts receivables either with or without recourse to the client, and
thus, exercises control over the credit extended to the customers and administers the sales
Securitization of debts:
Securitization of debts means giving the bills receivables as the security for the long term
The following are the tools used in this report to analyze the working capital position in
Trend Analysis
Ratio Analysis
Ratio Analysis:
Ratio Analysis is one of the powerful tools of the financial analysis. A ratio can be
relationship between two or more things”. Ratio analysis is a technique of analysis and
various ratios for helping in making certain decisions. They serve as indicators of
The accuracy and correctness of ratios are totally dependent on the reliability of
Personal bias.
FINANCIAL RATIOS
LIQUIDITY RATIOS:
Liquidity ratios measure the ability of the firm to meet its current obligations. These
are ratios which measure the finance position of a firm. It helps to assess the
sufficiency of its current assets to meet its current liability. The liquidity position is
satisfactory if current liabilities are easily met out of current assets. The liquidity
(a)Current ratio:
The current ratio shows the amount of short-term resources available to service
every rupee of current debt. It measures the general liquidity position of the firm
A high ratio reveals ability to pay current debts on time. The standard current ratio
formula:
CURRENT LIABILITIES
Table 11: Table showing the current ratio of PROSEAL over the last 4 years
Current
Year Current Assets Current Ratio
Liability
2007 118225545 63544916 1.86
2
1.8
1.6
1.4
1.2
CR 1
0.8 CR
0.6
0.4
0.2
0
2007 2008 2009 2010
Year
GRAPH -11
INTERPRETATION:
As can be seen from the chart, the current ratio has been on a decreasing trend
Current ratio’s of all the four years have not been up to the standard of 2:1,
This means that the company is not having sufficient funds to meet its current
liabilities. The current assets are increasing but the current liabilities are also
increasing rapidly. Therefore, the company does not have sufficient funds to
In the year 2008, the current ratio has been the least of 1.52, which is
extremely low and shows the unsatisfactory liquidity position of the firm.
This ratio establishes a relationship between the liquid assets and current
liabilities. It measures the ability of the firm to meet its current liabilities by using
only its liquid assets. A high ratio indicates good liquidity. The standard acid test
ratio is considered to be 1:1 . Acid test ratio is be calculated using the following
formula :
CURRENT LIABILITIES
Table 12: Table showing the Acid Test Ratio of PROSEAL Ltd. over the last four years.
Current
Year Liquid Assets Liquid Ratio
Liability
2007 52556183 63544916 0.83
0.9
0.8
0.7
0.6
0.5
LR Liquid Ratio
0.4
0.3
0.2
0.1
0
2007 2008 2009 2010
Year
GRAPH-12
INTERPRETATION:
All the four years have witnessed a highly unsatisfactory Quick Ratio.
The years 2008 and 2009 show the least with a quick ratio of 0.67. The year 2007
has shown a quick ratio of 0.83 whereas the year 2010 has the highest ratio of
0.85. But none of the years did the firm reach the ideal ratio of 1:1 .
This can be attributed to the considerable increase in the current liabilities over the
The firm in future has to design a policy to increase the liquid assets so as to meet
This ratio is the most vigorous measure of the firm’s liquidity position. The accepted
standard ratio is 0.5:1 . This means that rupee one worth of absolute liquid assets are
considered adequate to pay off rupees two worth current liabilities because all the
creditors are not expected to demand at the same time and cash can be realized from
debtors and inventory. Cash ratio can be computed by using the following formula:
CURRENT LIABILITIES
Table13: Table showing the Cash Ratio of PROSEAL Ltd. over the last four years.
0.12
0.10
0.08
Ratio 0.06
Ratio
0.04
0.02
0.00
2007 2008 2009 2010
Year
GRAPH-13
INTERPRETATION:
The Cash Ratio of PROSEAL Ltd., in all the four years is less than the accepted
Although these are not alarming signs for the company, the company has to be
careful that such a low ratio doesn’t prove to be detrimental to the firm’s
revenues.
This ratio also throws light on the fact that the proportion of cash in the liquid
The company needs to improve on this and maintain a better cash ratio.
Activity ratios indicate the efficiency with which the capital employed is rotated in the
2. The turnover.
In order to find out which part of the capital is efficiently employed and which part is not,
This ratio indicates whether investment in inventory is efficiently used or not. It therefore
explains whether investments in inventories are within proper limits or not. The ratio is
calculated as follows:
Average Inventory
SIGNIFICANCE:
The ratio is a measure to discover the possible trouble in the form of over-stocking
and over-valuation.
A low inventory turnover ratio results in the blocking of funds in inventory which
deteriorate in quality.
Table1 4: Table showing the inventory turnover ratio of PROSEAL Ltd. over the last
four years.
4.00
3.50
3.00
2.50
Ratio 2.00
1.50 Ratio
1.00
0.50
0.00
2007 2008 2009 2010
Years
GRAPH-14
INTERPRETATION:
The firm has witnessed a highly constant Inventory Turnover Ratio over the past
four years.
The year 2009 can be considered as the year in which the inventory movement
was at its best with a ratio of 3.82 times and the year 2007 faced the least with
3.05 times.
A low inventory turnover ratio results in the blockage of funds in inventory which
the firm faces no possible trouble in the form of over-stocking and over-valuation.
This is also known as Working Capital Leverage Ratio. This ratio indicates whether or
not the working capital has been effectively utilized in making sales. It is calculated as
follows:
Working Capital
SIGNIFICANCE:
In case a firm can achieve higher volume of sales with relatively small amount of
Table15: Table showing the working capital turnover ratio of PROSEAL Ltd., over the
Working
Year Sales Ratio
Capital
2007 164949145 54680629 3.02
6.00
5.00
4.00
Ratio 3.00
Ratio
2.00
1.00
0.00
2007 2008 2009 2010
Year
GRAPH-15
INTERPRETATIONS:
There has been a constant fluctuation in the Working Capital Turnover Ratio of
The ratio over the past four years has remained above 3 indicating the working
The year 2008 saw the highest working capital turnover ratio indicating that
The relationship between sales and current assets is called Current Assets Turnover Ratio.
Current Assets
SIGNIFICANCE:
This ratio indicates how much net sales are made for every rupee of investment in
current assets.
A low ratio may signify that the firm has an excessive investment in current
assets.
Table1 6: Table showing the Current Assets Turnover Ratio of PROSEAL Ltd., over the
2.00
1.50
Ratio 1.00
Ratio
0.50
0.00
2007 2008 2009 2010
Year
GRAPH-16
INTERPRETATION:
All four years witnessed a reasonably good Current Assets Turnover Ratio,
suggesting that Current Assets were very profitably used in these years.
The year 2009 saw the sales amounting to twice the amount invested in Current
generating.
The year 2009 also threw light on the point that a little increase in the investments
the speed with which the payments for credit purchases are made to the creditors. This
= Credit Purchases
Or
= Total Purchases
Significance:
A high ratio may also indicate the company is not utilizing the credit period to the
full extent.
Table1 7: Table showing the Creditors Turnover Ratio of PROSEAL Ltd., over the last
four years.
Credit Average
Year Ratio
Purchases Creditors
2007 101158713 33523917.5 3.02
3.50
3.00
2.50
2.00
Ratio
1.50 Ratio
1.00
0.50
0.00
2007 2008 2009 2010
Year
GRAPH-17
It is also called as Average Payment Period. The ratio gives the average credit period
Or
SIGNIFICANCE:
A low credit period may also mean that the firm is not taking full advantage of
Table 18: Table showing the Debt Payment Period of PROSEAL Ltd., over the last four
years.
Creditors
Months in a Debt Payment
Year Turnover
year Period
Ratio
2007 12 3.02 3.97
7.00
6.00
5.00
4.00
No. of Months
3.00 Debt Payment Period
2.00
1.00
0.00
2007 2008 2009 2010
Year
GRAPH-18
INTERPRETATION:
The firm has been maintaining quite low Creditor’s Turnover Ratio over the past
four years indicating that the firm is taking full advantage of the credit facilities
offered.
As a result, the debt payment period has been on a higher side over the years with
On one hand it may be improving its profitability by utilizing the credit period to
the fullest. On the other hand this says that the firm is not quite concerned about
its credit worthiness and image in the market by delaying the payment to creditors.
If the firm is able to strike the right balance between maintaining its image and
using the credit period given judiciously, it will be the icing on the cake of an
current assets and therefore the quality of debtors to a great extent determines a firm’s
SIGNIFICANCE:
Sales to Accounts Receivables indicate the efficiency of the staff entrusted with
The higher the ratio the better it is, since it would indicate debts are being
The ratio helps in cash budgeting since the flow of cash from customers can be
Table 19: Table showing the Debtors’ Turnover Ratio of PROSEAL Ltd., over the last
four years.
Average Debtors
Year Credit Sales Accounts Turnover
Receivables Ratio
2007 164949145 20782416.5 7.94
12.00
10.00
8.00
Ratio 6.00
Debtors Turnover Ratio
4.00
2.00
0.00
2007 2008 2009 2010
Year
GRAPH-19
This ratio indicates the extent to which the debts have been collected in time. It gives the
average debt collection period. The ratio is very helpful to the lenders because it explains
to them whether their borrowers are collecting money within a reasonable time. An
increase in the period will result in greater blockage of the funds in debtors. The ratio
Or
= Accounts Receivables
SIGNIFICANCE:
It measures the quality of debtors since it measures the rapidity or slowness with
A shorter collection period implies prompt payments by the debtors; it reduces the
A longer collection period implies too liberal and inefficient credit and collection
inefficiency.
Its average collection should be compared with that of the industry; it should
Table 20: Table showing the Debt Collection Period of PROSEAL Ltd., over the last four
years.
Debtors Debt
Months in a
Year Turnover Collection
year
Ratio Period
2007 12 7.94 1.51
1.60
1.40
1.20
1.00
No. of months0.80
0.60 Debt Collection Period
0.40
0.20
0.00
2007 2008 2009 2010
Year
GRAPH-20
INTERPRETATIONS:
The firm’s collection policy has been considered reasonably good as its Debt
Collection Period over the four years has been hovering around 1.35 months (on
an average).
The year 2009 was the year in which the firm made best use of its debtors by
converting them into cash in 1.04 months with a Debtors Turnover Ratio of 11.56
times.
The other three years have also been good with a debtor’s turnover ratio of 7.93,
7.54 and 9.47 for the years 2007, 2008 and 2010 respectively.
The firm should take measures to maintain such collection policies which
The firm may also consider analyzing the credit worthiness of its customers as an
FINDINGS
LTD., along with the analysis of a few ratios shows that the working capital
position of the company has been really strong over the years.
There has been an increase in the demand for the products manufactured by the
company. This has lead to an increase in the production activities of the company
The high demand for the products has led to an increase in the sales of the
company which in turn has led to an increase in the debtors to the company. But
the period for collection of debts from the trade customers has been 1.35 months
The most worrying aspect in the company is that the current ratio, liquid ratio and
cash ratio has been way below the required standard. The cash ratio of the
company has been below the required standard of 0.5:1 in all four years. This
shows that the proportion of cash and marketable securities in the liquid assets is
very low and the company needs to improve on it and maintain a better cash ratio.
On the other hand, the company has had a very low inventory turnover ratio in all
the four years with the lowest being 3.05 times in the year ending 31/03/08. A low
inventory turnover ratio results in the blocking of funds in inventory which may
The creditors have shown an increase in the year ending 31/03/07 and then a
decrease in the year ending 31/03/08. The increase in the year ending 31/03/07 is
due to an increase in the production activities of the company due to which the
company has had to purchase a greater quantity of raw materials on credit. In the
year ending 31/03/08 the amount of creditors has come down as the company has
The company has maintained a low creditors’ turnover ratio over the past four
years and so is fully utilizing the credit facilities offered to them. Though the
The analysis of working capital turnover ratio shows that the relationship between
working capital and sales is quite volatile. In spite of such volatility, the
The year 2007 saw a dip in the working capital turnover ratio which may be an
indicator of a high level of dead working capital in this year. However, in the
following 2 years, the company has maintained a steady ratio which suggests that
the working capital was used quite efficiently during those years.
The current assets turnover ratio gives us a clear picture of the elasticity between
the investments in current assets and the sales of the company. The year 2008-09
was the year in which the investment in current assets proved to be the most
profitable with a current assets turnover ratio of 1.92. The current assets turnover
ratio has been quite profitable even in the other 3 years. This shows the firm’s
ability to use its working capital effectively in order to generate high sales and
CONCLUSION
Working capital is that portion of the assets of a business which are used in current
operations, and is represented at any time by the operating cycle of such items, as against
merchandise, notes, or bills receivables and cash. The study on working capital is of
major importance due to its close relation with the day to day operations of a business.
conducted in order to find out their actual working capital requirements and know how
efficiently it is being utilized in the day to day operations by the methods of ratio
analysis, trend analysis and common size income statements which helps us to compare
From the study it was identified that the working capital position of the company has
been really strong over the past 4 years and has also been increasing. There is an increase
in production activities due to an increase in demand for their products, due to this factor
SUGGESTIONS
The firm’s absolute liquidity position is a major concern as the investment in cash
and marketable securities is extremely low. The firm should either improve its
absolute liquidity position or make sure that in future, such a low ratio doesn’t
The company’s debt collection and payment policies are pretty good. However,
the company should give importance to its credit worthiness and also that its
payment period is a little higher than its collection period. If this is used
The company should assess its customers before extending credit to them. This
reduces the bad debts on one hand and if done properly, the company will no
longer require the services of a factor to collect its book debt and so the company
The dead working capital in the company has been increasing over the past three
years. The company should find alternative avenues for investing these funds so to
obtain a steady return. This will also help the company in maintaining liquid
funds.