1

A REPORT

ON

ASSESSMENT Of
WORKING CAPITAL

IN

SUBMITTED TO:

JAGAN INSTITUTE OF MANAGEMENT STUDIES

IN FULFILLMENT OF THE REQUIREMENTS FOR

POST GRADUATE DIPLOMA IN MANAGEMENT (PGDM)

SUBMITTED BY
 2

ANKITA ARORA
PGP

ACKNOWLEDGEMENT

For the successful completion of this project, the guidance and inputs of
Mr. Mohit Goyal, EXECUTIVE – HISSAR BRANCH.

I would like to thank Mr. Lokesh Singhal, Branch Head, Hissar Branch, for
provided me the opportunity to undertake my summer training in this
prestigious bank.

I also express my gratitude towards other staff members of AXIS BANK

Ltd., HISSAR BRANCH, who helped me to polish my skills, enhance my
knowledge, provide practical knowledge which would help me in my future
course of professional carrier.

I am also thankful to my all teachers and mentor for providing me

supportive and cooperative environment, and guiding me towards the
completion of the project. Without the help and guidance of all the above
this project would not have been possible.

ANKITA ARORA
P.G.P I
 3

CONTENTS OF INDEX

1. Introduction Pg No.
1.1 Synopsis 6
1.2 Problems 8
1.3 Justification 9
1.4 Limitation of the Study 10

2. Outline 11

3. Company Profile
3.1 Introduction 12

3.2 Financial Performance 14

2.3 Vision and Mission 17

2.4 Core Values 18

2.5 Products 19

2.6 Credit Facility 21

3. Working Capital Management

3.1 An Introduction 25
3.2 Operating Cycle or Working Capital Cycle 27
3.3 Objective of working capital 39
 4

4. Assessment of Working Capital

4.0 Introduction 41
4.1 Methods of Assessment 43

5. Financial Analysis
5.0 Fund Flow Analysis 49
5.1 Ratio Analysis 51
5.3 Conclusion 63

6. Bibliography 64
 5

Preface

Masters in Business Administration, A course conducted

which strives to achieve harmonious relationship between
theoretical and practical aspects of business.
As a part of curriculum it is imperative for the students
passing this course to undergo training in an organization of
repute to understand its functioning and have a practical
exposure of management. I was thus Assigned summer
training for two months with “AXIS BANK” Hissar.
As the part of my M.B.A programme, I was accorded the
opportunity to under go project of AXIS Bank. During the
period of Axis Bank the topic of “Assessment of Working
Capital” was taken.
 6

INTRODUCTION

SYNOPSIS

TITLE OF THE PROJECT : ASSESSMENT OF WORKING

CAPITAL MANAGEMENT
DURATION OF THE : 45 DAYS
PROJECT

OBJECTIVE:- The present study of Working Capital Management in

AXIS BANK is intended to examine the efficiency of management

performance in working capital. It has been determined by the efficient
administration of various components of working capital, Inventory, account
receivable and cash.

The project’s aim is to determine the efficiency and effectiveness of

management in each segment of working capital. The extent to which the
current asset and current liability are administered, determines to a very
large extent the success or failure of the business.

The project has been carried out with the help of data provided by annual
accounts and related data of other section of development. Ratio analysis,
Cash Flow Statement has been used as an analytical tool for better
understanding of Working Capital Management.
 7

PRIMARY OBJECTIVES

• TO GAIN DETAILED KNOWLEDGE OF GIVEN TOPIC AND

THE RELATED TOPICS

• TO LEARN AND PRACTICE THE FINANCE CONCEPTS AND

TOOLS USED DURING THE PROJECT.

SECONDARY OBJECTIVES

• TO STRENGTHEN OUR BASE WHILE DOING THE PROJECT

BEFORE OPTING FOR SPECIALISATION IN FINANCE

• TO GAIN SOME PRACTICAL KNOWLEDGE WHILE

INTERACTING WITH COMPANY EXECUTIVES

• TO IMPROVE REPORT WRITING SKILLS

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1.1 PROBLEM

The DEVELOPING ECONOMIES are generally faced with

problem of inefficient utilization of resources available to them. Capital is
the scarcest productive resource in such economies and proper utilization of
these resources promotes the rate of growth, cut down the cost of production
and above all improves the efficiency of the productive system. Fixed
capital and working capital are the dominant contributors to the total capital
of developing country. Fixed capital investment generates

Productive capacity whereas working capital makes the utilization of

capacity possible. Thus, the study of working capital behavior occupies an
important place in financial management. . The earlier emphasis of financial
management was more on long-term financial decisions. Working capital
management which is concerned with short-term financial decision appears
to have been relatively neglected in the literature of finance. A deeper
understanding of the importance of working capital and its satisfactory
provision can lead not only to material savings in the economical use of
capital but can also assists in furthering the ultimate aim of a business,
namely, that of maximizing financial returns on the minimum amount of
capital which need to be employed.

In addition working capital has acquired a great significance and sound

position for the twin objects of “profitability and liquidity”. All the above
factors clearly indicate the crucial importance of working capital in
management of finance.

1.2 JUSTIFICATION FOR THE STUDY

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Importance of working capital management stems from the two reasons viz.,
(i) a substantial portion of total investment is invested in current assets and
(ii) level of current assets will changed quickly with the variation in sales.
Hence, in this study an attempt has been made to analysis the size and
composition of working capital and whether such an investment has
increased or declined over a period of time. After determining the
requirements of current assets, one of the important tasks of the financial
analyst is to select an assortment of appropriate source of finance for the
current assets. Normally, the excess of current assets over current liabilities
should be financed by long-term sources. Precisely it is not possible to find
out which long-term source has been used to finance current assets, but it
can be examined as to what proportion of current assets has been financed
by long-term funds. Therefore, an attempt has been made in this regard. In
working capital analysis, the direction of change over a period of time is of
crucial importance. Not only that, analysis of working capital trends
provides a base to judge whether the practice and prevailing policy of the
management with regard to working capital is good enough or an
improvement is to be made in managing the working capital funds. Hence in
this study, an attempt is made about the trend of the working capital
management of the selected enterprise, to have higher profitability, the firms
may sacrifice solvency and maintained a relatively low level of current
assets. When the firms do so, their profitability will improve as less funds
are tide up in the idle current assets, but their solvency will be threatened.
Hence an attempt is made to study the association of profitability with the
 10

working capital ratios. With this end in view, an effort has been made in this
project to make an in depth study of working capital.

1.3 LIMITATION OF THE STUDY

In my view my study of the working capital management has certain

limitations. Because I just spent only 45 days in the company and whatever
information during that short period I could gather, I worked upon that. Thus
my study does not present an overall view of the working capital
management at “AXIS BANK”.
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OUTLINE

Name of Bank : Axis Bank

Operation Begun In : 1994
Registered Office : Ahmedabad
Central Office : Mumbai
CEO : Mrs. Shikha Sharma
Branches : 835
ATMs : 3595
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COMPANY PROFILE

.Axis Bank India, the first bank to begin operations as new private banks in
1994 after the Government of India allowed new private banks to be
established. Axis Bank was jointly promoted by the Administrator of the
specified undertaking of the Unit Trust of India (UTI-I), Life Insurance
Corporation of India (LIC) and General Insurance Corporation Ltd. Also
with associates viz. National Insurance Company Ltd., The New India
Assurance Company, The Oriental Insurance Corporation and United
Insurance Company Ltd. On July 30, 2007 UTI Bank has changed its name
to Axis Bank. This is the first time that a bank has gone in for a brand-
change voluntarily; earlier names of banks have been changed either due to
a merger or an acquisition

Axis Bank has business of Rs.1,02,000.00 crore with a market capitalization

of Rs.21,817.00Crore making it the fifth largest Bank in India. It has 60 lakh
customers and communicating to them the name change would be the prime
exercise for the bank.

It has more than 574 branch offices and Extension Counters in the country
with over 2428 Axis Bank ATM proving to be one of the largest ATM
networks in the country. It commits to adopt the best industry practices
internationally to achieve excellence. It has strengths in retail as well as
corporate banking.

By the end of June 2007, Axis Bank in India had over 60 lakhs debit cards.
This is the first bank in India to offer the AT PAR Cheque facility, without
any charges, to all its Savings Bank customers in all the places across the
country where it has presence.
 13

Few milestones of the Axis bank:

Mar '07 : Axis Bank joins hands with IIFCL to provide leverage for
infrastructural projects in the country.
Mar '07 : AXIS Bank comes up with full license bank branch in Hong Kong.
Feb '07 : Finance minister Shri P. Chidambaram introduces Shriram – AXIS
Bank Co - Branded Credit Card especially for Small Road Transport
Operators (SRTOS).
AXIS Bank holds the position of being the first Indian Bank to
Aug'06 : successfully issue Foreign Currency Hybrid Capital in the International
Market.
Aug '06 : AXIS Bank launches the beneficial scheme of issuance of "Senior
Citizen ID Card" in collaboration with Dignity Foundation.
Dec '05 : AXIS Bank adds International Financing Review (IFR) Asia 'India
Bond House' award for the year 2005 in its appreciation record.
Jul '05 : AXIS Bank and Visa International launch Mobile Refill facility -
Anytime, Anywhere Pre-Paid Mobile Refill for all Visa Cardholders in
India.
Mar '05 : AXIS Bank gets counted on the London Stock Exchange, raises US$
239.30 million through Global.

Financial Performance:
 14

The bank continues to record an impressive year-on-year performance,

earning a net profit of Rs. 1,81,5.36 crores for the financial year 2008-09
against Rs. 1,071.03 crores in the previous year.

Rising Profitability ( in crores)

2000 1815
1800
1600
1400
1200 1071
1000
800 659
600 485
335
400
200
0
2004-05 2005-06 2006-07 2007-08 2008-09
Net Profit

CORE MANAGEMENT TEAM

 15

Mr. R.K. Bammi : President - North Zone

Mr. S.K. Nandi : President – West Zone
Mr. S.K. Mitra : President – East Zone
Mr. C.P. Rangarajan : President – South Zone

Highlights

 Profit after Tax up 69.50% to Rs. 1,815.36 crores

 16

 Net Interest Income up 42.58% to Rs.

3,686.21crores
 Fee and other Income up 63.63% to Rs. 2523.02
crores
 Deposits up 33.95% to Rs. 1,17,374.11 crores
 Net NPA ratio as a percentage of net customer
assets down to 0.35% from 0.36%
 Earning Per Share increased from Rs. 32.15 to
50.61

MISSION AND VISION

 17

 Customer Service and Product Innovation tuned to

diverse needs of individual and corporate clientele.
 Continuous technology upgradation while maintaining
human values.
 Progressive globalization and achieving international
standards.
 Efficiency and effectiveness built on ethical practices.

CORE VALUES

 Customer Satisfaction through:

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 Providing quality service effectively and

efficiently
 “Smile, it enhances your face value” is a service
quality stressed on
 Periodic Customer Service Audits
 Maximization of Stakeholder value
 Success through Teamwork, Integrity and People

PRODUCTS AT A GLANCE:
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ACCOUNTS AND DEPOSITS

Banking should be effortless. With AXIS Bank, the efforts are rewarding.
No matter what a customer's need and occupational status, we have a range
of solutions that are second to none.

Whether customer employed in a company and need a simple Savings

account or run your own business and require a robust banking partner,
AXIS Bank not only has the perfect solution for you, but also can
recommend products that can augment planning for the future.

Savings Accounts

These accounts are primarily meant to inculcate a sense of saving for the
future, accumulating funds over a period of time. Whatever occupation,
bank is confident that customer will find the perfect banking solution.
Features offered for Trust/Associations/Government Bodies/NGO’s:

 Saving Account with no minimum balance requirement.

 At Par Cheque Facility.
 Free anywhere banking.
 Free Collections of Cheques.
 Free Demat Account.

Current Accounts

Now, with an AXIS Bank Current Account, experience the freedom of

multi-city banking! Users can have the power of multi-location access to
their account from any of our 835 branches in 228 cities. Not only that,
they can do most of their banking transactions from the comfort of their
office or home without stepping out.

Fixed Deposits
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Long-term investments form the chunk of everybody's future plans. An

alternative to simply applying for loans, fixed deposits allow you to borrow
from your own funds for a limited period, thus fulfilling your needs as well
as keeping your savings secure.

LOANS:

Personal Loans brings customer one step closer to their dreams

 Retail Loan
 Personal Loan
 Vehicle Loan
 Consumer Loan
 Loan against Property
 Loan against Deposit
 Education Loan
 Corporate Loan

Credit Facility:
Credit Facility is broadly classified into two categories:
 21

Types of Credit Facilities

Non Fund Based Credit Facilites

Fund Based Credit Facilites

Cash Credit
Bank
Guarantee

Term Loan

Letter Of
Bill Finance Credit

FUND BASED CREDIT FACILITY

• Cash Credit Or Overdraft:

 22

A cash credit or overdraft is an arrangement by which a banker allows

his customer to borrow up to a certain limit. This is the most popular
made of borrowing by large commercial and industrial concerns in
India, on account of the advantage that a customer need not borrow at
once, the whole of the amount he is likely to require, but can draw such
amount as and when require.

• Term Loan:
Term loans are granted to customers generally for meeting capital
expenditure needs of the business. Term loans are granted in one lump sum
and are allowed to be repaid over a period of time in installments.

• Bill Finance:
Bill Finance is also one of the important facets of lending by banks.
Generally the bill finance is conducted through discounting of bills of
exchange drawn by the borrower or third persons on the borrower

Basis of Difference Cash Credit Over Draft

Securities Primary securities on Primary security on

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stocks and Book

debts. property.
Requirement Stock statement is Stock statement not
required required.
Charges Bank charges on No charge on stock
stock and book and book debts
debts.
Inspection Quarterly inspection Inspection is not
is mandatory mandatory

NON FUND BASED CREIDT FACILITY

• Guarantee facility:
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Banker in his business of lending extends various facilities to its

constituents. Under this facility the bank undertakes to discharge the liability
of borrower to third parties.

• Letter of Credit Facility

Letter of credit facility is another Non Fund Based facility extended by
bankers to their constituents. Under this facility banker undertakes to pay
on presentation of documents of title of goods.

WORKING CAPITAL

The word working capital is a combination of two words working and

capital. In business, the word working means circulation of capital from one
 25

form to another form during day to day operations of the business, where as
the word capital refers to the monetary value of all assets (tangible and
intangible) of the business.
Working capital is that part of the firm’s capital which is required for
financing short term or current assets such as inventories, debtors,
marketable securities and cash. It is also known as circulating or revolving
capital or short term capital or liquid capital. There is a lot of difference of
options among accountants, financial experts, entrepreneurs and economists.
Therefore, it is essential to mention the different concepts of working
capital.

 Traditional or balance sheet concept

 Operating cycle method

Traditional concept:
According to this concept, working capital depicts the position of the firm at
a certain point of time. It is calculated on the basis of a balance sheet
prepared at a specific date. With this point of view, working capital is of two
types as
1. Gross working capital

2. Net working capital

Gross working capital:

The sum of current assets of the firm represents working capital. All the
current assets of the business, whether these have been financed either from
long term funds or short term funds, form the working capital of a firm.
 26

Net working capital

It is the difference between current assets and current liabilities or the excess
of current assets over current liabilities. It may be defined as that part of a
firm’s current assets which financed with long term funds. The net working
capital may either be positive or negative. When the current assets exceed
the current liabilities, the working capital is positive. The negative working
capital results when the current liabilities are more than current assets.
The excess of current assets over current liabilities is a Qualitative aspect of
working capital and it measures the firm’s liquidity. It also indicates the
extent to which working capital can be financed with the long term funds.
According to this concept, an increase in current assets would not affect the
net working capital if there is a corresponding increase in current liabilities,
as the difference between current assets current liabilities will remain the
same. The net working capital can only be increased by

 Increased in the share capital

 long term loans
 sale of fixed assets
 Ploughing back of profits.

This concept is useful only for accountants, investments, creditors or those

persons who have interest in liquidity and financial soundness of the firm.
The gross concept is suitable from business pint of view, where as, from
accounting point of view, net concept is more appropriate. As per general
 27

practice, net gross capital is simply as ‘working capital’ and gross capital is
‘circulating capital’ or ‘current capital’.

A firm should maintain an optimum level of gross working capital. This will
help in avoiding the unnecessary stoppage of work or chance of liquidation
due to insufficient working capital. On the other hand, net working capital is
the amount of funds that must be invested by the firm, more or less,
regularly in current assets.

Operating cycle concept:

The Working Capital cycle or Cash Conversion cycle as it is also called is

usually expressed in terms of the number of days. This figure is the average
time that it takes to turn investment in books into cash and profit. Typically,
investment in raw materials, work-in-progress and finished goods is
followed by sales for cash or on credit. Credit sales funds are usually
collected at a later date. Investment is needed at each stage to finance
current assets. The cycle may be expressed in terms of the length of time
between the acquisition of raw materials and other inputs and the flow of
cash from the sale of goods. The following diagram shows the operating
cycle of a manufacturing firm:-
 28

Operating Cycle refers to the length of time necessary to

complete the following cycle of events.

1. Conversion of cash into raw materials.

2. Conversion of raw materials into work in progress.

3. Conversion of work in progress into finished goods.

4. Conversion of finished goods into receivable and

5. Conversion of receivable into cash.

In symbols it can be expressed as follows:

 29

O = R+W+F+D-C

Where,

O = Time duration of operating cycle

R = Raw material and storage period

W = Work in progress period

F = Finished goods storage period

D = Debtors collection period and

C = Creditors period

The components of operating cycle can be calculated as

follows: -
Average stock of raw materials and stores
R =
-------------------------------------------------------------------
Average raw materials and stores consumption per
day

Average work in process inventory

W = -------------------------------------------------
Average cost of production per day

Average finished goods inventory

F = ---------------------------------------------------
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Average cost of goods sold per day

Average book debts

D = -------------------------------------------
Average credit sales per day

Average trade creditors

C = --------------------------------------------
Average credit purchase per day

Types of working capital:

It may be defined in 2 ways as

 on the basis of balance sheet concept
 on the basis of time

On the basis of balance sheet concept, working capital is classified as gross

working capital and net working capital as described earlier.

On the basis of time, working capital may be classified as

 Permanent or regular working capital

 Variable or temporary working capital.

Permanent or regular working capital:

Permanent or regular working capital represents the irreducible minimum

amount which is permanently blocked in the business and that cannot be
 31

converted into cash in the normal course of business. It is required for

permanent investments in holding minimum quantity of stock of raw
material and finished goods, debtors and cash. This amount is a continuous
basis for maintaining the circulation of current assets. As the business
grows, the requirement of permanent working capital also increase in
current assets. This portion of working capital is financed through long term
sources.
Permanent working capital has the following characteristics:
 It keeps on changing its form one current assets to another.
 The size of working capital grows with the growth of business.
 As long as firm is a going concern, this part of working capital can
not be substantially reduced.

Variable or temporary working capital:

Any amount over and above the permanent level of working capital is
variable or temporary working capital. It keeps on fluctuating from time to
time as per the change in production and sales activities. As the requirement
of this part of working capital fluctuates, therefore it should be financed
from short term funds, whenever needed.
It may be classified as:

Seasonal working capital:-

 32

The capital required to meet the seasonal demands of the enterprise is called
seasonal working capital. Seasonal working capital being of short term
nature , it has to be financed from short sources like bank loan etc.

Specific working capital:-

It is that part of working capital which is required to meet unforeseen

contingencies like slump, strike, flood, war etc. sometimes, additional
working capital is to be arranged to meet special emergencies such as
launching of extensive marketing campaign, purchase of goods for stock in
view of future increase in price etc.
 33

How to determine working capital ?

There is no criterion or formula to determine the amount of working

capital needs that may be applied to all the firms. The amount of working
capital required depends upon a large no of factors and each factor has its
own importance. These are as follows:-

 NATURE OF BUSINESS

The requirement of working capital is very limited in public utility

undertaking such as Electricity, Water Supply and Railways because they
offer cash sales only and supply services not products and no funds are tied
up in inventories and receivables. On the other hand, the trading and
financial firm requires less investment in fixed assets but have to invest
large amounts in current assets. The manufacturing undertaking requires
sizable amount of working capital along with fixed investments.

 PRODUCTION POLICY: -

The determination of working capital needs depends upon the production

policy of the business. The demand for certain products is seasonal i.e.; such
products are purchased in certain months of a year. For such industries, two
types of production policy can be followed. Firstly they can produce the
goods in the months of demand or secondly, they produce for the whole
year. If the second alternative were followed, it would mean that until the
 34

time of demand finishes, product would have to be kept in stock. It would

require additional working capital.

 LENGTH OF PRODUCTION CYCLE: -

The longer the manufacturing time, the raw material and other supplies have
to be carried for a longer time in the process with progressive increment of
labor and service costs before the final product is obtained. Therefore,
working capital is directly proportional to the length of the manufacturing
process.

 RATE OF STOCK TURNOVER: -

There is an inverse co-relationship between the quantum of working capital

and the velocity or speed with which the sales are affected. A firm having a
higher rate of stock turnover will need lower amount of working capital as
compared to a firm having a low rate of turnover.

CREDIT POLICY: -
Credit policy affects the working capital requirements in two ways:
(a) Terms of credit allowed by customer to the firm,
(b) Terms of credit available to the firm.
A concern that purchases its requirements on credit and sells its
product/services on cash requires lesser amount of working capital and
vice-versa.
 35

 WORKING CAPITAL CYCLE: -

The speed with which the working cycle completes one cycle determines
the requirements of working capital. Longer the cycle larger is the
requirement of working capital.

WORKI
NGCAPI
TAL
CYCLE
 36

Each component of working capital (namely inventory, receivables and

payables) has two dimensions ... TIME ......... and MONEY. When it comes
 37

to managing working capital - TIME IS MONEY. If you can get money to

move faster around the cycle (e.g. collect monies due from debtors more
quickly) or reduce the amount of money tied up (e.g. reduce inventory levels
relative to sales), the business will generate more cash or it will need to
borrow less money to fund working capital. As a consequence, you could
reduce the cost of bank interest or you'll have additional free money
available to support additional sales growth or investment. Similarly If you
can negotiate improved terms with suppliers e.g. get longer credit or an
increased credit limit, you effectively create free finance to help fund future
sales

IF….

You.. Then..

Collect receivables (debtors) You release cash from the

faster cycle
Collect receivables (debtors) Your receivables soak up cash
slower
Get better credit (in terms of You increase your cash
duration or amount) from resources
suppliers

 RATE OF GROWTH AND EXPANSION OF BUSINESS: -

The larger size businesses require more permanent and variable working
capital in comparison to small business. If a company is growing, its
 38

working capital requirements will also go on increasing. Thus, the growing

concerns require more working capital as compared to the stable industries.
 SEASONAL VARIATION: -

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

 BUSINESS FLUCTUATION

In period of boom, when the business is prosperous, there is a need for

larger amount of working capital due to rise in sales, rise in prices,
optimistic expansion of business etc. On the contrary in time of depression,
the business contracts, sales decline, difficulties are faced in collection from
debtors and the firm may have a large amount of working capital idle.

 PRICE LEVEL CHANGES: -

Price level changes also affect working capital needs. If the prices of
different goods increase, to maintain same level of production, more
working capital is needed.

 AVAILABILITY OF RAW MATERIAL: -

Availability of raw material on the continuous basis affects the requirement

of working capital. There are certain types of raw materials, which are not
available regularly. In such a situation firm requires greater working capital
to meet the requirements of production. Some raw materials are available in
 39

particular season only for example wool, cotton, oil seeds, etc. They have to
keep greater working capital.

 MAGNITUDE OF PROFIT: -

Magnitude of profit is different for different businesses. Nature of product,

control on the market and ability of managers etc. determine the quantum of
profit. If the profit margin is high, it will help to arrange funds internally,
which will also increase the working capital.

 OTHER FACTOR: -

a) Operating efficiency

b) Management ability

c) Irregularities of supply

d) Import policy

e) Asset structure

NEEDS AND OBJECTIVES FOR WORKING CAPITAL

Every business needs some amount of working capital. The needs for
working capital, arises due to time gap between production and realization
of cash from sales. There is an operating cycle involved in sales and
realization of cash. There are time gaps in purchase of raw material and
production, production and sales, and realization of cash.
 40

Thus, working capital is needed for the following purposes: -

• For the purchase of raw material, component and spares.

• To pay wages and salaries.
• To incur day- to- day expenses and overhead costs such as fuel, power
and office expenses etc.
• To meet the selling costs such as packing, advertising etc.
• To provide credit facilities to the customers.
• To maintain the inventories of raw material, work in progress, store,
spares, and finished stock

For studying the need of working capital in a business, one has to study the
business under varying circumstances such as new concern, as a growing
and one, which has attained maturity. A new concern requires a lot of funds
to meets its initial requirement such as promotion and formation etc. These
expenses are called preliminary expenses and are capitalized. The amount
needed for working capital depends upon the size of the company and the
ambition of its promoters. Greater the size of the business unit, generally
will be the requirement of the working capital. The requirement of the
working capital goes on increasing with the growth and expansion of the
business until its gains maturity. At maturity, the amount of working capital
required is called normal working capital.
 41

Assessment of Working Capital:

For running any business activity the unit/firm requires mainly two type of
assets i.e. Current Assets and Fixed Assets. For financing Fixed Assets Bank
generally sanction Term Loan and for current assets bank sanction cash
credit limit/ bill purchases.

Mainly three type of borrowers approaching banks for working capital

finance

 Trading Concerns
 Manufacturing Units
 Service Sector

In case of manufacturing units, Current Assets comprises Raw Material,

Semi Finished Goods, Finished Goods, Receivables, Cash etc. These assets
go through the operating cycle of business units and based on operating
cycle requirement for working capital decided.
 42

In case of Trading concerns, Current Assets comprises stocks, debtors,

receivables and advances paid to suppliers of stocks. Where as in Service
Activity, Current Assets comprises expenses on wages, rent, electricity etc.

Working Capital Assessment is to ensure that genuine day to day business

needs of the borrowers are met. This is based on Accepted Project
Production/Sales, Margin available with the party, accepted holding level of
stocks.

With the streamlining credit delivery system of commercial banks, RBI had
appointed several committees in the past. Some important committees are

 Daheja Committee in 1968

 Tondon Committee in 1975
 43

Methods for Assessment of Working Capital:

1. Turn Over Method:
a. For Micro and Small Enterprises (MSEs) as per our bank’s
credit policy. Borrowers- limit upto Rs.5 crores.
b. For Non-MSE borrowers-limit upto Rs.1crores.

Calculation of limit as per Turn Over Method:

1. Accepted level of Projected Annual Turn Over (PAT)

2. Working Capital funds @25% of PAT.

3. Borrower’s contribution:
a. 5% of PAT
b. Projected NWC
c. Higher of 3(a) and 3(b)
 44

4. Bank finance:

a. 20% of PAT
b. minus 3c

5. .Permissible Bank finance

a. Lower of 4 (a) and 4( b).

Important points to be kept in mind while deciding limits based on

PAT:

 The projected annual turnover should

be realistic and achievable.
 The assessment of working capital
credit limits should be done both as per PAT basis and traditional
method. Higher of the limit calculated from the method should be
sanctioned to the borrower.
 The level of trade credit should be in
tune with past practice. Where projected trade credit is lower than
the past level.
 45

2. Traditional method:

a. For MSE borrower-limit of above Rs.5 crore but less than

Rs.50 crore.
b. For non MSE borrower-limit if above Rs.1 crore and less than
Rs.50 crores

Assessment of Working Capital Requirement as per Traditional method/

Tandon Committee Method/ MPBF Method.

1st method of lending

Total Current Assets (CA) 100

Less: Other Current Liabilities 60

 46

Excluding bank borrowing

Working Capital Gap 40

Less: 25%of WCG or NWC 10

Whichever is higher
Maximum permissible bank finance 30

Minimum current ratio 1.17:1

Applicable for sick and weak units.

2nd Method of lending

Total Current Assets (CA) 100
Less: Other Current Liabilities 60

Excluding Bank Borrowings

Working Capital Gap 40
Less: 25%of CA or NWC 25

Whichever is higher
Maximum Permissible Bank Finance 15
Minimum Current Ratio 1.33:1
All borrowers other than sick/weak units and seasonal
industries. For sugar industry, the Minimum Current Ratio
prescription is 1:1.
 47

3. Cash budget method:

a. For MSE borrowers dealing in cyclical industries (seasonal) like. Tea,
sugar etc.
b. For borrowers availing fund based working capital limits of
Rs.50crores and above.

Under this method the borrower is required t submit the Cash Budget to
the bank along with actual as well as projected Financial Statement. The
Budget will provide the following information.

1) The Peak Level of bank finance requirement during the course of

the year.
2) The Current level of bank finance requires as forecast by the split
budget (monthly/quarterly) basis.
48
 49

Fund Flow Analysis

INTRODUCTION

A fund flow statement is statement of sources and uses of funds for a

given period. It is also known as-Statement of Changes in Financial
Position.

While Balance sheet shows the position of sources and uses of funds
as on a given date, fund flow statement, shows flows of funds during
a specific period. Similarly while a profit and loss account shows flow
of only revenue nature transaction during a period, fund flow
statement shows flow of funds both capital and revenue nature
during a period.

Itmes treated as Sources of funds:

1) Increase in an item of liability - eg. Increase in Capital, Term

Loan, Debentures, Deferred Credits etc.
 50

2) Decrease in an item of Assets - eg. Sale of

Investment/Machinery.

Items treated as Use of funds:

1) Decrease in an item of liability – eg. Repayment of Term Loan,

Withdrawal of Capital, Decrease in Bank Borrowings.

2) Increase in an item of assets – eg. Purchase of Machinery,

Land, Investment etc.

How does a Banker treat the following items while preparing

fund flow statement:

1. Reserves and Surplus: Instead of writing the increase in

reserves and surplus as a sources, PROFIT AFTER TAX is

written as source and Dividends paid during the period as use.

2. Profit: Profit being prime source of fund, fund flow statement

begins with profit as the source. Profit may be Net Profit before
tax or net profit after tax. Where Net Profit Before Tax is taken as
source, the amount of tax paid is shown as use.

3. Fixed Assets: Change in Net Fixed Assets is not taken into

consideration, instead the gross Fixed Assets position is taken

 51

into account and increase and decrease of the same is taken or

source respectively.

4. Depreciation: The increase in depreciation during the period is

taken as source of fund.

5. Dividends: Dividends payments during the period are taken as

Uses of Fund.

Use of fund flow statement for sanction and disbursal of term

loan facility

This statement provides information regarding various points:

1. How much and when funds are required for the project.
2. From where funds will be coming.
3. When the term loan disbursement are to be made.

The term loan is released as per projected Fund Flow Statement at

periodic intervals and is compared with the actual availability of funds
from the projected sources.

Use of fund flow statement for monitoring of advances:

Fund flow statements are used for monitoring of both Term loan and
working capital facilities sanctioned to the constituents. Monitoring is
done by comparing the projected figures in CMA with the actual
submitted in QIS and variance found out for taking remedial action.
 52

RATIO ANALYSIS:

Ratio analysis is a technique of analysis and interpretation of financial

statements. It is the process of establishing and interpreting various ratios for
helping in making certain decisions. However, ratio analysis is not an end
itself. It is only a means of better understanding of financial strength and
weakness of a firm.

The following are four steps involved in the ratio analysis:-

 Selection of relevant data from financial statement depending upon

objective of analysis.
 Calculation of the appropriate ratios from the above data.

Comparison of the calculated ratios with the ratio of same firm in the past,
or the ratios developed from projected financial statements or the ratios of
 53

some other firms or the comparisons with ratios of the industry to which the
firm belongs.

1 Key Working Capital Ratios

A few key performance ratios of a working capital management system are

the working capital ratio, inventory turnover and the collection ratio. Ratio
analysis will lead management to identify areas of focus such as inventory
management, cash management, accounts receivable and payable
management. The following are some of the important ratios in working
capital assessment

Ratio Formulae Result Interpretation

Stock Average Stock = x On average, you turn over the value of

Turnover * 365/ days your entire stock every x days. You may
 54

need to break this down into product

groups for effective stock management.

Cost of Goods
(in days) Obsolete stock, slow moving lines will
Sold
extend overall stock turnover days. Faster

production, fewer product lines, just in

time ordering will reduce average days.

It take you on average x days to collect

monies due to you. If your official credit

Receivables terms are 45 day and it takes you 65

Debtors * 365/ = x
Ratio days... why?
Sales days
(in days) One or more large or slow debts can drag

out the average days. Effective debtor

management will minimize the days.

On average, you pay your suppliers every

x days. If you negotiate better credit terms

this will increase. If you pay earlier, say, to

Creditors *
Payables get a discount this will decline. If you
365/ = x
Ratio simply defer paying your suppliers
Cost of Sales days
(in days) (without agreement) this will also increase
(or Purchases)
- but your reputation, the quality of service

and any flexibility provided by your

suppliers may suffer.

Current Total Current = x Current Assets are assets that you can
 55

readily turn in to cash or will do so within

12 months in the course of business.

Current Liabilities are amount you are due

to pay within the coming 12 months. For

Assets/
example, 1.5 times means that you should
Ratio Total Current times
be able to lay your hands on $1.50 for
Liabilities
every $1.00 you owe. Less than 1 times

e.g. 0.75 means that you could have

liquidity problems and be under pressure

to generate sufficient cash to meet

oncoming demands.
(Total Current

Assets - Similar to the Current Ratio but takes

= x
Quick Ratio Inventory)/ account of the fact that it may take time to
times
Total Current convert inventory into cash.

Liabilities
(Inventory +
A high percentage means that working
Working Receivables - As %
capital needs are high relative to your
Capital Ratio Payables)/ Sales
sales.
Sales
 56

5.1 Ratio Analysis

The two main types of ratios that have been analyzed in this topic are as
follows:

(a) Liquidity Ratios:

The importance of adequate Liquidity in the sense of the ability of a firm

to meet current or short term obligation when they become due for
payment can hardly be over stressed. In fact, liquidity is a prerequisite
for the very survival of a firm. The short term creditors of a firm are
interested in the short term solvency or liquidity of a firm. But liquidity
implies, from the view point of utilization of the funds of the firms, that
funds are idle or they earn very little. A proper balance between the two
contradictory requirements that is liquidity and profitability is required
for efficient financial management. The liquidity ratios, measure the
ability of a firm to meet its short term obligations and reflect the short
term financial strength or solvency of the firm.
 57

The ratios that indicate the liquidity of a firm are:

 Current Ratio
 Liquid Ratio
 Cash Ratio

(b) Activity Ratios: Funds are invested in various assets in business to

make sales and earn profits. The efficiency with which assets are managed
directly effect the volume of sales. The better the management of assets, the
larger is amount of sales and profits. Activity ratios measures are efficiency
or effectiveness with which a firm manages it resources or assets. These
ratios are also called turnover ratios because they indicate the speed with
which Assets all are converted into sales. Depending upon the purpose, a
number of turnover ratios can be calculated.

Following are the activity ratios:

 Stock Turnover Ratio

 Inventory Conversion Ratio
 Debtors Turnover Ratio
 Average Collection Period
 Creditors Turnover Ratio
 Average Payment Period
 Fixed Asset Turnover Ratio
 Working Capital Turnover Ratio
 58

A. LIQUIDITY RATIOS

Current Assets
1. Current Ratio =
Current Liabilities

2006-2007 2007-2008 2008-2009

Year
C.A. 55,36,81,08 54,08,18,489 64,73,83,780
6
C.L. 23,66,64,063 42,00,28,914
24,03,53,05
8
C.R. = 2.3 = 1.02 = 1.54

COMMENTS

From the above figures it is evident that CR decreased from 2.3% to 1.02%
and in next year increases to 1.54%. Ideal CR is 2:1. in the year 2006-07 Cr
was higher than the normal standards but afterwards it declined to great
extend which is not a good sign for the company.

Liquid Assets
2. Liquid Ratio =
Current Liabilities
 59

2006-2007 2007-2008 2008-2009

Year

L.A. 13,84,14,06 18,75,76,604 17,12,66,939

6
C.L. 23,66,64,063 42,00,28,914
24,03,53,05
8
L.R. = 0.58 = 0.79 = 0.41

COMMENTS

Generally a quick ration 1:1 is considered satisfactorily. As we see that

company quick ratio is not the benchmark in any of the years, hence it is not
a good sign for the company. Although in the year 2007-08, the ratio is close
to 1 but in the year 2008-09 it has shown a big decline.

Cash
3. Cash Ratio =
Current Liabilities
 60

2006-2007 2007-2008
YEAR
2008-2009
Cash 4,28,88,012 12,38,25,078 6,02,68,163
C.L.
CL 24,03,53,058 23,66,64,063 42,00,28,914

= 0.18 = 0.52 = 0.14

COMMENTS

The cash ratio was very good in the year 2007-08, but in the year 2008-09, it
has shown a big decline which is not a good sign for the company. Normally
20% of the current liabilities should be kept in form of cash and bank
balances.

B. ACTIVITY RATIOS
Net Sales
1. Capital Turnover Ratio =
Capital employed

2006-2007 2007-2008 2008-2009

Year
Net 4,83,63,87,05 4,81,25,23,940 6,19,31,59,238
Sales 5
Capital 48,08,51,925 29,13,42,952
Emp. 36,98,10,690
C.T.R. =13.08 = 10.01 = 21.26
 61

COMMENTS

The C.T.R. is very high for the company continuously and the in the year
2008-09 it has shown a tremendous increase, which is a very good sign for
the company.

Sales
2. Total Assets Turnover ratio =
Net Assets

2006-2007 2007-2008 2008-2009

Year
Sales 4,83,63,87,055 4,81,25,23,940 6,19,31,59,238
Net
Assets. 1,28,92,82,675 1,40,64,41,981 1,11,43,08,955
T.A.T.. =3.75 = 3.42 = 5.56
COMMENTS

Total assets turnover is increasing in the year 2008-09, which reveals that
the current assets of company is increasing but its current liabilities are also
increasing. So, it shows the strengthen position of company.

Sales
3. Debtors Turnover =
Debtors
 62

2006-2007
Year
2008-2009
Sales 4,83,63,87,055 4,81,25,23,940 6,19,31,59,238
Debtors. 9,55,26,054 6,37,51,526 11,09,98,776

D.T.R. =50.63 = 70.49 = 55.8

COMMENTS

It indicates the number of times debtor’s turnover each year. Generally the
higher value of debtor’s turnover the more efficient is the management.
Increasing debtor’s turnover ratio therefore reveals better management of
credit. In fact in last three fiscal years, this ratio has been excellent for the
company.

Debtors
4. Average Collection period =
Sales
x 360

2006-2007 2007-2008 2008-2009

Year
Debtors 9,55,26,054 6,37,51,526 11,09,98,776

Sales. 4,83,63,87,055 4,81,25,23,940 6,19,31,59,238

A.C.P.. =7.11 = 4.77 = 6.45
 63

COMMENTS

It measures the quality of debtors since it indicates the speed of their

collection, the shorten the collection period the better quality of debtors.
Hence this period is very short in all the years, therefore the quality of
debtors of the company is very good.

CONCLUSION

AXIS bank is a leading bank in the private sector. It has a large no. of
branches in various cities and has a large no of potential customers. In my
training period I observed that bank is facing a much stiffer competitive
environment that just temporary aberration of recession. They have to face
situation like a rapid erosion of technology advantage, disappearance of
natural boundaries, aggressive competition, uncertain consumer behavior
 64

fragmentation of media, individualization of taste and move relating

specifically to different categories. Now from my study of assessment of
working capital I learnt various methods of assessing working capital.
Working capital gives information about credibility of organization. On the
basis of working capital various ratios can be calculated. Different ratios
show financial position of an organization. So assessing working capital
helps bank to know about credit worthiness of its client.

Finally, We can say that on overall basis the project taken provides deep
knowledge and practical aspects.

Bibliography
Books
• C. R. Kothari: Research Methodology
• Financial management –I.M. Panday

Annual report of :
• AXIS BANK

Websites
• www.AXISbank.com
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Magazines

• Business Today

• Business World