PROJECT REPORT

ON

WORKING CAPITAL MANAGEMENT

A report submitted in partial fulfillment of the requirement for the degree
of

Master of Business Administration

(2016 2017)

To

Punjabi University, Patiala

Submitted To:- Submitted By:-

Mrs. Ratneet Kaur Sukhdeep

Kaur
MBA 4th sem
Roll No. 1456

MALWA COLLEGE, BATHINDA

(Affiliated to Punjabi University, Patiala)

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 Approved By AICTE, New Delhi

DECLARATION

I declare that the project report submitted to my college Malwa

College, Bathinda. In partial fulfillment for the degree of Master
of Business Administration on Working Capital
Management.

This is a result of my own work under continuous guidance and kind

co-operation of our college faculty member I have not submitted this
report to any other university for the award of degree.

(Sukhdeep Kaur)

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 ACKNOWLEDGEMENT

First of all, inspiration and motivation have always played a key role in the
success of any venture. Working on this project was a challenge and made
us a bit filtery in the beginning.

At this level of understanding, it is often difficult to understand a wide

spectrum of knowledge without proper guidance and advice .hence, we
take this opportunity to express our heartfelt gratitude to Mrs. Ratneet
Kaur, for his round oclock enthusiastic support and commentaries which
made this project successful, we are thankful to him for making
impossible look easy for us.

We also extend our sincere gratitude to Mrs. Ratneet Kaur, for his
inspiration, encouragement and for the impetus obtained throughout the
course of our project.

Finally, with all the heartiest thanks, I hope my project report will be a
great success and a good source of learning.

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 CONTENTS

Sr.
Content Page No.
No.
1. Working Capital Management 5
2. Need of Working Capital Management 6
3. Concepts and Types 7
4. Determinants of working Capital 9
5. Research Methodology 11
6. Working Capital Level 12
7. Classification of Working Capital Ratios 17
8. Components of WC Management 23
9. Motive of Holding Cash 26
10. Working Capital Finance & Estimation 28
11. Conclusion 33
12. Bibliography 34

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WORKING CAPITAL MANAGEMENT
Working capital management is concerned with the problems arise
in attempting to 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 ware 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 should be large
enough to cover its current liabilities in order to ensure a reasonable
margin of the safety.

Definitions :

According to Guttmann & Dougall:-

Excess of current assets over current liabilities.

According to Park & Gladson:-

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,
accounts payable, taxes owned to government).

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Need of working capital management
The need for working capital gross or current assets cannot be over
emphasized. As already observed, the objective of financial decision
making is to maximize the shareholders wealth. To achieve this, it is
necessary to generate sufficient profits can be earned will naturally
depend upon the magnitude of the sales among other things but
sales cannot convert into cash. 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 labour 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

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Gross working capital and Net working capital
There are two concepts of working capital management

1. Gross working capital

Gross working capital refers to the firm s investment I current

assets. Current assets are the assets which can be convert in to cash
within year includes cash, short term securities, debtors, bills
receivable and inventory.

2. Net working capital

Net working capital refers to the difference between current assets

and current liabilities. Current liabilities are those claims of outsiders
which are expected to mature for payment within an accounting
year and include creditors, bills payable and outstanding expenses.
Net working capital can be positive or negative efficient working
capital management requires that firms should operate with some
amount of net working capital, the exact amount varying from firm
to firm and depending, among other things; on the nature of
industries.net working capital is necessary because the cash
outflows and inflows do not coincide.

The cash outflows resulting from payment of current liabilities are

relatively predictable. The cash inflow are however difficult to
predict. The more predictable the cash inflows are, the less net
working capital will be required.

The concept of working capital was, first evolved by Karl Marx. Marx
used the term variable capital means outlays for payrolls advanced
to workers before the completion of work. He compared this with
constant capital which according to him is nothing but dead labour.
This variable capital is nothing wage fund which remains blocked in
terms of financial management, in work-in-process along with other
operating expenses until it is released through sale of finished
goods. Although Marx did not mentioned that workers also gave
credit to the firm by accepting periodical payment of wages which
funded a portioned of W.I.P, the concept of working capital, as we
understand today was embedded in his variable capital .

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8
Type of working capital
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 of current assets a
destination should be drawn between permanent and temporary
working capital.

1) Permanent 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

2) Temporary 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 as result of seasonal changes

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Determinants of working capital
The amount of working capital is depends upon a following factors

1. Nature of business:- Some businesses are such, due to their

very nature, that their requirement of fixed capital is more rather
than working capital. These businesses sell services and not the
commodities and that too on cash basis. As such, no founds are
blocked in piling inventories and also no funds are blocked in
receivables. E.g. public utility services like railways, infrastructure
oriented project etc. there requirement of working capital is less. On
the other hand, there are some businesses like trading activity,
where requirement of fixed capital is less but more money is blocked
in inventories and debtors.

2. Length of production cycle:- In some business like machine

tools industry, the time gap between the acquisition of raw material
till the end of final production of finished products itself is quit high.
As such amount may be blocked either in raw material or work in
progress or finished goods or even in debtors. Naturally there need
of working capital is high.

3. Size and growth of business:- In very small company the

working capital requirement is quit high due to high overhead,
higher buying and selling cost etc. as such medium size business
positively has edge over the small companies. But if the business
start growing after certain limit, the working capital requirements
may adversely affect by the increasing size.

4. Business/ Trade cycle:- If the company is the operating in the

time of boom, the working capital requirement may be more as the
company may like to buy more raw material, may increase the
production and sales to take the benefit of favorable market, due to
increase in the sales, there may more and more amount of funds
blocked in stock and debtors etc. similarly in the case of depressions
also, working capital may be high as the sales terms of value and
quantity may be reducing, there may be unnecessary piling up of
stack without getting sold, the receivable may not be recovered in
time etc.

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5. Terms of purchase and sales:- Some time due to competition
or custom, it may be necessary for the company to extend more and
more credit to customers, as result which more and more amount is
locked up in debtors or bills receivables which increase the working
capital requirement. On the other hand, in the case of purchase, if
the credit is offered by suppliers of goods and services, a part of
working capital requirement may be financed by them, but it is
necessary to purchase on cash basis, the working capital
requirement will be higher.

6. Profitability:- The profitability of the business may be vary in

each and every individual case, which is in turn its depend on
numerous factors, but high profitability will positively reduce the
strain on working capital requirement of the company, because the
profits to the extend that they earned in cash may be used to meet
the working capital requirement of the company.

7. Operating efficiency:- If the business is carried on more

efficiently, it can operate in profits which may reduce the strain on
working capital; it may ensure proper utilization of existing
resources by eliminating the waste and improved coordination etc.

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Research Methodology
Research methodology is a way to systematically solve the research
problem. It may be understood as a science of studying now
research is done systematically. In that various steps, those are
generally adopted by a researcher in studying his problem along
with the logic behind them.

It is important for research to know not only the research method

but also know methodology. The procedures by which researchers go
about their work of describing, explaining and predicting
phenomenon are called methodology. Methods 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 now 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.

Types of data collection

There are two types of data collection methods available. 1. 2.

Primary data collection Secondary data collection

1) Primary data

The primary data is that data which is collected fresh or first hand,
and for first time which is original in nature. Primary data can collect
through personal interview, questionnaire etc. to support the
secondary data.

2) Secondary data collection method

The secondary data are those which have already collected and
stored. Secondary data easily get those secondary data from
records, journals, annual reports of the company etc. It will save the

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time, money and efforts to collect the data. Secondary data also
made available through trade magazines, balance sheets, books etc.

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Working capital level
The consideration of the level 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 it s inability to meet it s
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 working capital frequently. The
management should be prompt to initiate an action and correct
imbalance

Working capital trend analysis

In working capital analysis the direction at changes over a period of
time is of crucial importance. Working capital is one of the important
fields of management. It is therefore very essential for an annalist to
make a study about the trend and direction of working capital over a
period of time. Such analysis enables as to study the upward and
downward trend in current assets and current liabilities and it s
effect on the working capital position.

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 According
to R.C.galeziem The trend is defined as smooth irreversible
movement in the series. It can be increasing or decreasing.

Emphasizing the importance of working capital trends, Man Mohan

and Goyal have pointed out that analysis of working capital trends
provide as base to judge whether the practice and privilege policy of
the management with regard to working capital is good enough or
an important is to be made in managing the working capital funds.
Further, any one trend by it self is not very informative and therefore
comparison with Illustrated their ideas in these words, An upwards
trends coupled with downward trend or sells, accompanied by

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marked increase in plant investment especially if the increase in
planning investment by fixed interest obligation

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Current assets
Total assets are basically classified in two parts as fixed assets and
current assets. Fixed assets are in the nature of long term or life
time for the organization. Current assets convert in the cash in the
period of one year. It means that current assets are liquid assets or
assets which can convert in to cash within a year.

Composition of current assets

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, the
profitability will be decreased because cash is non earning assets.

Current liabilities
Current liabilities mean the liabilities which have to pay in current
year. It includes sundry creditors means supplier whose payment is
due but not paid yet, thus creditors called as current liabilities.
Current liabilities also include short term loan and provision as tax
provision. Current liabilities also includes bank overdraft. For some
current assets like bank overdrafts and short term loan, company
has to pay interest thus the management of current liabilities has
importance

Changes in working capital

There are so many reasons to changes in working capital as follow
1. Changes in sales and
2. Operating expanses

The changes in sales and operating expanses may be due to three

reasons

1. There may be long run trend of change e.g. The price of row
material say oil may constantly raise necessity the holding of
large inventory.

2. Cyclical changes in economy dealing to ups and downs in

business activity will influence the level of working capital both
permanent and temporary.

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 3. Changes in seasonality in sales activities

4. 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 relationship between current assets and sales
volume.

Operating Cycle

The need of working capital arrived because of time gap between

production 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.

Operating cycle is an important concept in management of cash and

management of cash working capital. The operating cycle reveals
the time that elapses between outlays of cash and inflow of cash.
Quicker the operating cycle less amount of investment in working
capital is needed and it improves profitability. The duration of the
operating cycle depends on nature of industries and efficiency in
working capital management.

Calculation of operating cycle

To calculate the operating cycle of JISL used last five year data.
Operating cycle of the JISL vary year to year as changes in policy of
management about credit policy and operating control

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Working Capital Ratio analysis
Ratio analysis is the powerful tool of financial statements analysis. A
ratio is defined as the indicated quotient of two mathematical
expressions and as the relationship between two or more things. The
absolute figures reported in the financial statement do not provide
meaningful understanding of the performance and financial position
of the firm. Ratio helps to summaries large quantities of financial
data and to make qualitative judgment of the firm s financial
performance

Role of ratio analysis

Ratio analysis helps to appraise the firms in the term of there
profitability and efficiency of performance, either individually or in
relation to other firms in same industry. Ratio analysis is one of the
best possible techniques available to management to impart the
basic functions like planning and control. As future is closely related
to the immediately past, ratio calculated on the basis historical
financial data may be of good assistance to predict the future. E.g.
On the basis of inventory turnover ratio or debtor s turnover ratio in
the past, the level of inventory and debtors can be easily
ascertained for any given amount of sales. Similarly, the ratio
analysis may be able to locate the point out the various arias which
need the management attention in order to improve the situation.
E.g. Current ratio which shows a constant decline trend may be
indicate the need for further introduction of long term finance in
order to increase the liquidity position. As the ratio analysis is
concerned with all the aspect of the firm s financial analysis liquidity,
solvency, activity, profitability and overall performance, it enables
the interested persons to know the financial and operational
characteristics of an organization and take suitable decisions.

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Limitations of ratio analysis
1. The basic limitation of ratio analysis is that it may be difficult
to find a basis for making the comparison Normally, the ratios
are calculated on the basis of historical financial statements.
An organization for the purpose of decision making may need
the hint regarding the future happiness rather than those in
the past.
2. The external analyst has to depend upon the past which may
not necessary to reflect financial position and performance in
future. The technique of ratio analysis may prove inadequate
in some situations if there is differs in opinion regarding the
interpretation of certain ratio.

As the ratio calculates on the basis of financial statements, the

basic limitation which is applicable to the financial statement is
equally applicable In case of technique of ratio analysis also i.e.
only facts which can be expressed in financial terms are
considered by the ratio analysis. The technique of ratio analysis
has certain limitations of use in the sense that it only highlights
the strong or problem arias, it dose not provide any solution to
rectify the problem arias

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Classification of working capital ratio
Working capital ratio means ratios which are related with the
working capital management e.g. current assets, current liabilities,
liquidity, profitability and risk turnoff etc. these ratio are classified as
follows

1. Efficiency ratio

The ratios compounded under this group indicate the efficiency of

the organization to use the various kinds of assets by converting
them the form of sale. This ratio also called as activity ratio or assets
management ratio.

As the assets basically categorized as fixed assets and current

assets and the current assets further classified according to
individual components of current assets viz. investment and
receivables or debtors or as net current assets, the important of
efficiency ratio as follow

1. Working capital turnover ratio

2. Inventory turnover ratio

3. Receivable turnover ratio

4. Current assets turnover ratio

2. Liquidity ratio

The ratios compounded under this group indicate the short term
position of the organization and also indicate the efficiency with
which the working capital is being used. The most important ratio
under this group is follows

1. Current ratio

2. Quick ratio

3. Absolute liquid ratio

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Efficiency ratio
1) Working capital turnover ratio

It signifies that for an amount of sales, a relative amount of working

capital is needed. If any increase in sales contemplated working
capital should be adequate and thus this ratio helps management to
maintain the adequate level of working capital. The ratio measures
the efficiency with which the working capital is being used by a firm.
It may thus compute net working capital turnover by dividing sales
by working capital.

The working capital turnover ratio measures how well a company is

utilizing its working capital to support a given level of sales. Working
capital is current assets minus current liabilities. A high turnover
ratio indicates that management is being extremely efficient in
using a firm's short-term assets and liabilities to support sales.
Conversely, a low ratio indicates that a business is investing in too
many accounts receivable and inventory assets to support its sales,
which could eventually lead to an excessive amount of bad debts
and obsolete inventory.

SALES
WORKING CAPITALTURNOVER RATIO=
WORKING CAPITAL

2) Inventory turnover ratio

Inventory turnover is a ratio showing how many times a company's

inventory is sold and replaced over a period of time. The days in the
period can then be divided by the inventory turnover formula to
calculate the days it takes to sell the inventory on hand. It is
calculated as sales divided by average inventory.

This ratio is important because total turnover depends on two main

components of performance. The first component is stock
purchasing. If larger amounts of inventory are purchased during the
year, the company will have to sell greater amounts of inventory to
improve its turnover. If the company can't sell these greater
amounts of inventory, it will incur storage costs and other holding
costs.

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22
Inventory turnover ratio indicates the efficiency of the firm in
producing and selling its products. It is calculated by dividing the
cost of good sold by average inventory:

COST OF GOODS SOLD

INVENTORY TURNOVER RATIO=
AVERAGE INVENTORY

The average inventory is the average of opening and closing

balance of inventory in a manufacturing company like JISL inventory
of finished goods is used to calculate inventory turnover ratio

3) Receivable turnover ratio

The derivation of this ratio is made in following way

GROSS SALES
RECEIVABLE TURNOVER RATIO=
AVERAGE ACCOUNT RECEIVABLES

1. Gross sales are inclusive of excise duty and scrap sales

because both may enter in to receivables by credit sales. Average
receivable calculate by opening plus closing balance divide by

2. Increasing volume of receivables without a matching increase in

sales is reflected by a low receivable turnover ratio.

It is indication of slowing down of the collection system or an extend

line of credit being allowed by the customer organization. The latter
may be due to the fact that the firm is loosing out to competition.

A credit manager engage in the task of granting credit or monitoring

receivable should take the hint from a falling receivable turnover
ratio use his market intelligence to find out the reason behind such
failing trend. Debtor turnover indicates the number of times debtors
turnover each year. Generally the higher the value of debtor s
turnover, the more is the management of credit.

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4) Current assets turnover ratio

Current Assets Turnover Ratio indicates that the current assets are
turned over in the form of sales more number of times. A high
current assets turnover ratio indicates the capability of the
organization to achieve maximum sales with the minimum
investment in current assets.

Current assets turnover ratio is calculate to know the firms efficiency

of utilizing the current assets .current assets includes the assets like
inventories, sundry debtors, bills receivable, cash in hand or bank,
marketable securities, prepaid expenses and short term loans and
advances. This ratio includes the efficiency with which current assets
turn into sales. A higher ratio implies a more efficient use of funds
thus high turnover ratio indicate to reduced the lock up of funds in
current assets. An analysis of this ratio over a period of time reflects
working capital management of a firm.

SALES
CURRENT ASSETS TURNOVER RATIO=
CURRENT ASSETS

LIQUIDITY RATIO
1) Current ratio

The current ratio is a financial ratio that investors and analysts use
to examine the liquidity of a company and its ability to pay short-
term liabilities (debt and payables) with its short-term assets (cash,
inventory, receivables). The current ratio is calculated by dividing
current assets by current liabilities:

CURRENT ASSETS
CURRENT RATIO=
CURRENT LIABILITIES

Current assets include cash and those assets which can be

converted in to cash within a year, such marketable securities,
debtors and inventories. All obligations within a year are include in
current liabilities. Current liabilities include creditors, bills payable
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accrued expenses, short term bank loan income tax liabilities and
long term debt maturing in the current year. Current ratio indicates
the availability of current assets in rupees for every rupee of current
liability.

2) Quick ratio

Quick ratios establish the relationship between quick or liquid assets

and liabilities. An asset is liquid if it can be converting in to cash
immediately or reasonably soon without a loss of value. Cash is the
most liquid asset .other assets which are consider to be relatively
liquid and include in quick assets are debtors and bills receivable
and marketable securities. Inventories are considered as less liquid.
Inventory normally required some time for realizing into cash. Their
value also be tendency to fluctuate. The quick ratio is found out by
dividing quick assets by current liabilities

The Acid-test or quick ratio or liquidity ratio measures the ability of a

company to use its near cash or quick assets to extinguish or retire
its current liabilities immediately. Quick assets include those current
assets that presumably can be quickly converted to cash at close to
their book values. A company with a quick ratio of less than 1
cannot currently fully pay back its current liabilities. It is the ratio
between quick or liquid assets and current and current liabilities,
normal liquid ratio is considered to be 1:1. It is considered to be
much better and reliable as a tool for assessment of liquidity
position of firms.

QUICK ASSETS
QUICK ( ACID)RATIO=
CURRENT LIABILITIES

QUICK ASSETS=CASH CASH EQUIVALENTS + MARKETABLE SECURITIES+ ACCOUNTABLE RECIE

Inventory is excluded from the sum of assets in the quick ratio, but
included in the current ratio. Ratios are tests of viability for business
entities but do not give a complete picture of the business' health. If

25
a business has large amounts in accounts receivable which are due
for payment after a long period (say 120 days), and essential
business expenses and accounts payable due for immediate
payment, the quick ratio may look healthy when the business is
actually about to run out of cash. In contrast, if the business has
negotiated fast payment or cash from customers, and long terms
from suppliers, it may have a very low quick ratio and yet be very
healthy.

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3) Absolute liquid ratio

Absolute liquid ratio extends the logic further and eliminates

accounts receivable (sundry debtors and bills receivables) also.
Though receivables are more liquid as comparable to inventory but
still there may be doubts considering their time and amount of
realization. Therefore, absolute liquidity ratio relates cash, bank and
marketable securities to the current liabilities. Since absolute
liquidity ratio lays down very strict and exacting standard of
liquidity, therefore, acceptable norm of this ratio is 50 percent. It
means absolute liquid assets worth one half of the value of current
liabilities are sufficient for satisfactory liquid position of a business.
However, this ratio is not as popular as the previous two ratios
discussed.

Even though debtors and bills receivables are considered as more

liquid then inventories, it cannot be converted in to cash
immediately or in time. Therefore while calculation of absolute liquid
ratio only the absolute liquid assets as like cash in hand cash at
bank, short term marketable securities are taken in to consideration
to measure the ability of the company in meeting short term
financial obligation. It calculates by absolute assets dividing by
current liabilities.

ABSOLUTE LIQUID (QUICK ) ASSETS

ABSOLUTE LIQUID(QUICK ) RATIO=
CURRENT LIABILITIES

ABSOLUTE LIQUID ( QUICK ) ASSETS=CASH CASH EQUIVALENTS + MARKETABLE SECURITIES

27
WORKING CAPITAL MANAGEMENT COMPONENTS
1) Receivables Management

2) Inventory Management

3) Cash Management

Receivables Management
Receivables or debtors are the one of the most important parts of
the current assets which is created if the company sells the finished
goods to the customer but not receive the cash for the same
immediately.

Trade credit arises when firm sells its products and services on credit
and does not receive cash immediately. It is essential marketing
tool, acting as bridge for the movement of goods through production
and distribution stages to customers. Trade credit creates
receivables or book debts which the firm is expected to collect in the
near future.

The receivables include three characteristics

1) It involve element of risk which should be carefully analysis.

2) It is based on economic value. To the buyer, the economic

value in goods or services passes immediately at the time of
sale, while seller expects an equivalent value to be received
later on

3) It implies futurity. The cash payment for goods or serves

received by the buyer will be made by him in a future period.

Objective of receivable management

The sales of goods on credit basis are an essential part of the

modern competitive economic system. The credit sales are generally
made up on account in the sense that there are formal
acknowledgements of debt obligation through a financial
instrument. As a marketing tool, they are intended to promote sales
and there by profit. However extension of credit involves risk and
cost, management should weigh the benefit as well as cost to
determine the goal of receivable management. Thus the objective of
receivable management is to promote sales and profit until that
28
point is reached where the return on investment in further funding of
receivables is less .than the cost of funds raised to finance that
additional credit

Average collection period

The average collection period measures the quality of debtors since

it indicate the speed of their collection. The shorter the average
collection period, the better the quality of the debtors since a short
collection period implies the prompt payment by debtors. The
average collection period should be compared against the firm s
credit terms and policy judges its credit and collection efficiency. The
collection period ratio thus helps an analyst in two respects. 1. In
determining the collectability of debtors and thus, the efficiency of
collection efforts. 2. In ascertaining the firm s comparative strength
and advantages related to its credit policy and performance. The
debtor s turnover ratio can be transformed in to the number of days
of holding of debtors.

Inventory Management
The term inventory is used to designate the aggregate of those
items of tangible assets which are

1. Finished goods ( saleable )

2. Work-in-progress ( convertible )

3. Material and supplies ( consumable )

In financial view, inventory defined as the sum of the value of

raw material and supplies, including spares, semi-processed
material or work in progress and finished goods. The nature of
inventory is largely depending upon the type of operation carried on.
For instance, in the case of a manufacturing concern, the inventory
will generally comprise all three groups mentioned above while in
the case of a trading concern, it will simply be by stock- in- trade or
finished goods.

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Objective of inventory management

In company there should be an optimum level of investment for any

asset, whether it is plant, cash or inventories. Again inadequate
disrupts production and causes losses in sales. Efficient
management of inventory should ultimately result in wealth
maximization of owner s wealth. It implies that while the
management should try to pursue financial objective of turning
inventory as quickly as possible, it should at the same time ensure
sufficient inventories to satisfy production and sales demand.

The objectives of inventory management consist of two

counterbalancing parts:

1. To minimize the firms investment in inventory

2. To meet a demand for the product by efficiently organizing

the firms production and sales operation.

This two conflicting objective of inventory management can also be

expressed in term of cost and benefits associated with inventory.
That the firm should minimize the investment in inventory implies
that maintaining an inventory cost, such that smaller the inventory,
the better the view point .obviously, the financial manager should
aim at a level of inventory which will reconcile these conflicting
elements.

Some objective as follow

1. To have stock available as and when they are required.

2. To utilize available storage space but prevents stock levels

from exceeding space available.

3. To maintain adequate accountability of inventories assets.

4. To provide, on item by- item basis, for re-order point and

order such quantity as would ensure that the aggregate result
confirm with the constraint and objective of inventory control.

5. To keep low investment in inventories carrying cost an

obsolesce losses to the minimum.

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Inventory components
The manufacturing firms inventory consist following components

I) Raw material

ii) Work- in-progress

iii) Finished goods

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 raw material
inventory and work in progress into finished goods.

Inventory holding period

The reciprocal of inventory turnover gives average inventory holding
in percentage term. When the numbers of days in year are divided
by inventory turnover, we obtain days of inventory holding (DIH).

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Management of Cash
Cash is common purchasing power or medium of exchange. As such,
it forms the most important component of working capital. The term
cash with reference to cash management is used in two senses, in
narrow sense it is used broadly to cover cash and generally
accepted equivalent of cash such as cheques, draft and demand
deposits in banks. The broader view of cash also induce hear- cash
assets, such as marketable sense as marketable securities and time
deposits in banks.

The main characteristics of this deposits that they can be really sold
and convert in to cash in short term. They also provide short term
investment outlet for excess and are also useful for meeting planned
outflow of funds. We employ the term cash management in the
broader sense. Irrespective of the form in which it is held, a
distinguishing feature of cash as assets is that it was no earning
power.

Company have to always maintain the cash balance to fulfill the

dally requirement of expenses.

There are four motives for holding cash as follow

1. Transaction motive

2. Precautionary motive

3. Speculative motive

4. Compensating motive

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Motive of holding cash
Transaction motive

Cash balance is necessary to meet day-to-day transaction for

carrying on with the operation of firms. Ordinarily, these
transactions include payment for material, wages, expenses,
dividends, taxation etc. there is a regular inflow of cash from
operating sources, thus in case of JISL there will be two-way flow of
cash- receipts and payments. But since they do not perfectly
synchronize, a minimum cash balance is necessary to uphold the
operations for the firm if cash payments exceed receipts. Always a
major part of transaction balances is held in cash, a part may be
held in the form of marketable securities whose maturity conforms
to the timing of anticipated payments of certain items, such as
taxation, dividend etc.

Precautionary Motive

Cash flows are somewhat unpredictable, with the degree of

predictability varying among firms and industries.

Unexpected cash needs at short notice may also be the result of

following:

1. Uncontrollable circumstances such as strike and natural

calamities.

2. Unexpected delay in collection of trade dues.

3. Cancellation of some order for goods due unsatisfactory

quality.

4. Increase in cost of raw material, rise in wages, etc.

The higher the predictability of firms cash flows, the lower will be
the necessity of holding this balance and vice versa. The need for
holding the precautionary cash balance is also influenced by the firm
s capacity to have short term borrowed funds and also to convert
short term marketable securities into cash.

Speculative motive

Speculative cash balances may be defined as cash balances that are

held to enable the firm to take advantages of any bargain purchases

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that might arise. While the precautionary motive is defensive in
nature, the speculative motive is aggressive in approach. However,
as with precautionary balances, firms today are more likely to rely
on reserve borrowing power and on marketable securities portfolios
than on actual cash holdings for speculative purposes.

Advantages of cash management

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.

1. A sufficient of cash can keep an unsuccessful firm going

despite losses

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, fascinating
temporary investment of cash and providing funds normal
growth.

Cash management involves balance sheet changes and other cash

flow that do not appear in the profit and loss account such as capital
expenditure.

Cash Cycle
One of the distinguishing features of the fund employed as working
capital is that constantly changes its form to drive business wheel. 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 example, from cash to inventories,
inventories to receivables and receivables to cash.

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 row 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 used during each year.

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Working Capital Finance and Estimation
Funds available for period of one year or less is called short term
finance. In India short term finance are used as working capital
finance. Two most significant short term sources of finance for
working capital are trade credit and bank borrowing. Trade credit
ratio of current assets is about 40%, it is indicated by Reserve Bank
of India data that trade credit has grown faster than the growth in
sales. Bank borrowing is the next source of working capital finance.
The relative importance of this varies from time to time depending
on the prevailing environment. In India the primary source of
working capital financing are trade credit and short term bank credit.
After determine the level of working capital, a firm has to consider
how it will finance. Following are sources of working capital finance.

Sources of working Capital Finance

1) Trade credit

2) Bank Finance

3) Letter of credit

Trade credit

Trade credit refers to the credit that a customer gets from suppliers
of goods in the normal course of business. The buying firms do not
have to pay cash immediately for the purchase made. This deferral
of payments is a short term financing called trade credit. It is major
source of financing for firm. Particularly small firms are heavily
depend on trade credit as a source of finance since they find it
difficult to raised funds from banks or other sources in the capital
market. Trade credit is mostly an informal arrangement, and it
granted on an open account basis. A supplier sends goods to the
buyers accept, and thus, in effect, agrees to pay the amount due as
per sales terms in the invoice. Trade credit may take the form of bills
payable. Credit terms refer to the condition under which the supplier
sells on credit to the buyer, and the buyer required to repay the
credit. Trade credit is the spontaneous source of the financing. As
the volume of the firm s purchase increase trade credit also expand.
It appears to be cost free since it does not involve explicit interest
charges, but in practice, it involves implicit cost. The cost of credit

35
may be transferred to the buyer via the increased price of goods
supplied by him.

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2) Bank finance for working capital

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 firms 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;
they deduct margin money.

Forms of bank finance

1) Term Loan

In this case, the entire amount of assistance is disbursed at one time

only, either in cash or the company s account. The loan may be paid
repaid in installments will charged on outstanding balance.

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 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.

4) Bills purchased / discounted

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

37
the present worth of amount of bill from of discount charges. On
maturity, bank collects the full amount of bill from the customer.

3) Letter of credit

In this case the exporter and the importer are unknown to each
other. Under these circumstances, exporter is worried about getting
the payment from the importer and importer is worried as to
whether he will get goods or not. In this case, the importer applies to
his bank in his country to open a letter of credit in favor of the
exporter whereby the importers bank undertakes to pay the
exporter or accept the bills or draft drawn by the exporter on the
exporter fulfilling the terms and conditions specified in the letter of
credit. Banks have been certain norms in granting working capital
finance to companies. These norms have been greatly influenced by
the recommendation of various committees appointed by the
Reserve Bank of India from time to time. The norms of working
capital finance followed by bank since mid-70 were mainly based on
the recommendations of the Tondan committee. The Chore
committee made further recommendations to strengthen the
procedure and norms for working capital finance by banks.

Estimation of working capital

After considering the various factors affecting the working capital

needs, it is necessary to forecast the working capital requirements.
For this purpose, first of all estimate of all current assets should be
made, these should be followed by the estimation of all current
liabilities. Difference between the estimated current assets and
estimated current liabilities will represent the working capital
requirements. The estimation of working capital requirement is
based on few assumptions such as follows.

1. Gross sales will increase by 40% Receivables collection period

will be 90 day as per standards fixed by company.
2. Unnecessary balance of Cash may reduce by finance
management.
3. For working capital finance company can use maximum trade
credit.
4. Inventory holding period can be 60 days instead of present 95
days.

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39
CONCLUSION
Working capital management is important aspect of financial
management. The study of working capital management of Jain
Irrigation system ltd. has revealed that the current ration was as per
the standard industrial practice but the liquidity position of the
company showed an increasing trend. The study has been
conducted on working capital ratio analysis, working capital
leverage, working capital components which helped the company to
manage its working capital efficiency and affectively.

Working capital of the company was increasing and showing positive

working capital per year. It shows good liquidity position. Positive
working capital indicates that company has the ability of payments
of short terms liabilities. Working capital increased because of
increment in the current assets is more than increase in the current
liabilities. Company s current assets were always more than
requirement it affect on profitability of the company. Current assets
are more than current liabilities indicate that company used long
term funds for short term requirement, where long term funds are
most costly then short term funds. Current assets components
shows sundry debtors were the major part in current assets it shows
that the inefficient receivables collection management. In the year
2006-07 working capital decreased because of increased the
expenses as manufacturing expenses and increase the price of raw
material as increased in the inflation rate. Inventory was supporting
to sales, thus inventory turnover ratio was increasing, but company
increased the raw material holding period. Study of the cash
management of the company shows that company lost control on
cash management in the year 2005-06, where cash came from fixed
deposits and ZCCB funds, company failed to make proper
investment of available cash.

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BIBLIOGRAPHY

Books Referred

1. I. M. Pandey - Financial Management - Vikas Publishing House Pvt.

Ltd. - Ninth Edition 2006

2. M.Y. Khan and P.K. Jain, Financial management Publishing house

ltd., New Delhi.

3. K.V. Smith- management of Working Capital- Mc - Grow Hill New

York

4. Satish Inamdar- Principles of Financial ManagementEverest

Publishing House Vikas

Websites References

1. www.jainseducationalmaterial.com

2. www.google.co.in

3. www.workingcapitalmanagement.com

4. www.businessandeconomy.com

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